About this site

Tuesday, February 17, 2009

Russell Lee What a party it's been! 1941Picnic grounds in Vale, Oregon, after Fourth of July parade

Ilargi: If we can agree that "confidence" is still the key word in the financial slash political crisis that seems to be getting started for real these days, what are we supposed to think when Timothy Geithner's own private fanclub magazine, the Washington Post, reveals that the newfangled Treasury Secretary and car mini czar had already spent 19 months (!) trying to find a way to get toxic assets out of US banks, before he turned on a dime and decided to present a plan with more holes than ideas a week ago?

19 months before you figure out that something doesn't work. And now there's still nothing on the table that does. What is this, a late night stand-up act? How long should we suspect Dim Timmy has been laying awake at night pondering how to save Detroit from its own bloated ego's and deflating bottom lines? A few months ago, analysts claimed that a 50% reduction in automakers' production capacity would lead to 2.25 million lay-offs. After which Detroit would still not be viable as a going concern. Current estimates are, it’s hard to believe, that 11 million cars will be sold in the US in 2009. Even if that were so, which I doubt, 75% of them would likely be second hand cars, which are losing value as fast as Detroit real estate.

At the same time, the entire stimulus theater, no matter how ill-conceived and all its poorly directed actors, stand to face an audience that can best be compared to the ones from Shakespearian days, armed with rotten eggs and tomatoes. In this case, they go by the moniker "bond-markets". Yes, there is a move towards a safe haven, and for many, Treasurys look like the ideal candidate. And yes, the US government will manage to sell quite a few. But they are not trying to sell as many as before: they want to sell record amounts of the stuff to finance all their bail-outs.

”...in a stark warning to Obama and the US, the Financial Times reports that the first German (10-year) bond issue of the year failed. Yes, that's the country with the far more favorable job numbers. There are far less questions about German solvency than there are about the US, and you can bet that Washington pays attention to news like that.

The FT claims that $3 trillion in -sovereign debt- bonds will be issued globally, three times more than in 2008, as national governments frantically try to plug the behemoth size black holes in their budgets. But the paper is way too conservative; unless the failures come early and fast, total attempted government bond issuance will far surpass $3 trillion. The money has to come from somewhere. But common sense indicates that economic prosperity and bond markets move largely in sync.

Therefore, as economies worldwide plunge, the bond markets will provide hard and bleak proof that they do not constitute a bottomless well."

Japan is the largest single holder of US treasury bonds. Japan, the first large rich country to dissolve rapidly into the political crisis that inevitably follows the economic one, won't be buying record amounts of sovereign debt this year. Neither will China or the oil states. So who will? The Federal Reserve? Nor is that the most insidious aspect of the unfolding tragedy. There are a zillion companies, states, counties and municipalities that will have to take a back seat to US government bonds (and those issued by other countries), precisely at the moment when other financing sources have all but dried up.

And that means that the record issuance of sovereign bonds will greatly speed up bankruptcies in all sectors of society. Whoever wishes to sell must pay high interest rates while real rates are close to zero, a, as I wrote back then. "... slow suicide recipe". Bailing out banks and useless carmakers, as well as building useless roads, with your money, doesn't just load you up with record amounts of additional debt, it also tears to shreds the very fabric of the communities you live in.

You'll have to wait 19 months for your government to figure out that one. needless to say, by then it'll be too late. For you. Heads, you lose, tails, you die.

Update 6.00 PM EST: Ilargi: It's been a while since I posted one of these DOW financials (+F, GM) charts. Here's today's damage:

Henry Paulson’s "bazooka" is looking more like an intercontinental ballistic missile. That’s the word the former Treasury secretary used in August to explain the firepower of hundreds of billions of dollars of U.S. stimulus. In November, China rolled out its own $586 billion bazooka. India, Indonesia, Japan, Malaysia and Singapore intend to raise spending to boost growth. Two things are worth noting about this unprecedented deluge. One, it marks the end of the corporate-bond market as we know it. It’s not going too far to declare corporate bonds dead for the foreseeable future. Two, Asia’s efforts to develop deeper debt markets are now on the backburner.

Government debt is already the U.S.’s most precious export. Paulson’s successor, Timothy Geithner, will oversee an even bigger expansion of debt issuance.Asia, too, will see an unprecedented bond boom. Why? Today’s growth forecasts are just way too optimistic. The International Monetary Fund expects Asia’s developing economies will expand 5.5 percent this year, the slowest pace since 1998. That’s highly optimistic considering the U.S., Japan and Europe are in recession, and China may be heading that way. How can companies hope to compete? The corporate market already has been hurt in secondary trading and primary-market issuance. Asia is about to see the next wave.

Governments have few options here and stimulus is badly needed. With so many bazookas being deployed, private companies risk being crowded out of debt markets, according to the Manila- based Asian Development Bank. Companies face multiple financing risks as they navigate global turmoil and increased competition. "Companies today face higher borrowing costs, and risks of any abrupt withdrawal of funds from emerging markets may prove to be an additional complicating factor for new local-currency denominated corporate bond issuance in emerging East Asia," says Jong Wha Lee, head of the ADB’s office of regional economic integration. Lee’s concern is that governments will "crowd out new corporate funding or refinancing."

All these bazookas may morph into something more lethal -- like a financial version of an ICBM. The U.S. is banking on Asia’s savings to finance its current and future stimulus efforts. There’s virtually zero chance the money approved thus far by Congress is sufficient to revitalize U.S. banks. More than 15 years after Japan’s asset bubble burst, that nation’s banks still aren’t lending money as hoped. The U.S. Treasury’s future borrowing efforts will bump up against those of Japan, China and Europe. This crisis has a drip-drip-drip dynamic that tends to make what seems implausible one day real the next. Expect today’s debt-issuance estimates to appear quaint by comparison a year from now.

Japan is a case in point. Asia’s biggest economy is sure to announce ambitious new issuance plans. Japanese were shocked enough in December when Prime Minister Taro Aso scrapped plans to balance the budget. Just wait until he -- or, given his 14 percent voter support rate, his successor -- unveils plans to open the borrowing floodgates. China, too. Never mind the spin in Beijing. Its $3.3 trillion economy is slowing fast and needs far more support than the government’s plans to date. European governments also are sure to increase borrowing programs to stabilize growth. "I’m concerned about the fiscal policy in some countries" of the euro region, European Central Bank Executive Board member Juergen Stark said in Baden Baden, Germany, on Feb. 12. "The fiscal situation in some countries is alarming. Governments urgently have to address the problems. The markets react to increasing debt levels."

Stark noted that he’s already concerned about a crowding- out phenomenon in Europe. Imagine how he will feel if deepening recessions necessitate even greater government borrowing. This won’t be a good year for fiscal conservatives. The non-partisan Congressional Budget Office says U.S. stimulus efforts might provide a short-term boost to growth, but the added debt burden and crowding out of private investment will be a net drag on the economy and wages by 2014. A similar experience may befall Asia, too. "Governments will absolutely overwhelm the market in ways we have not seen before," says Jeff Brunton, head of credit markets at AMP Capital Investors in Sydney.

The deluge adds another element to Asia’s 2009. The region’s efforts to create deeper debt markets will be undermined. Asia still needs international markets for corporate and asset-backed debt. You can forget that for a while. The good news is that Asian-currency bonds will dominate this wave as governments turn to local capital markets for funding and as overseas investors favor sovereign issuers or state-owned companies. It was borrowing in foreign currencies that got Asia into trouble a decade ago. To help alleviate pressure on corporate borrowers, the ADB is in talks with the countries of the Association of South East Asian Nations, plus Japan, China, and South Korea, to set up a fund providing credit guarantees for local-currency debt. That’s all well and good. With so many government bazookas being aimed at markets, though, private bond issuers are in for a trying few years.

The spread between the rate to exchange floating for fixed interest payments and Treasury yields over two years widened to the most in over a month on concern banks may face credit-rating reductions and demand for U.S. government debt as a haven increased. The difference between the two-year swap rate and the benchmark Treasury note yield, known as the swap spread, widened to as much as 78.25 basis points from 69 basis points on Feb. 13. The spread, now at 72.5 basis points, is a gauge of investor perceptions of credit risk and is based on expectations for the London interbank offered rate, or Libor. Treasury yields fell the most in a week and global equity markets slumped after Moody’s Investors Service said it might downgrade banks with units in eastern Europe.

Swap rates serve as benchmarks for many types of debt often purchased with borrowed money, including mortgage-backed securities and auto-loan securities. This means wider swap spreads can drive borrowing costs higher, even if Treasury yields are steady. “The movement in swap spreads is a carryover from trading in Europe,” said Fidelio Tata, head of derivatives strategy at RBS Greenwich Capital in Greenwich, Connecticut. “European banks are doing very poorly and since they are part of the U.S. dollar Libor panel this impacts the U.S. swap spread as well.” The two-year swap spread fell to 49.88 on Jan. 12, its lowest since Aug. 2007, before the global credit crisis began. It surged to 167.25 on Oct. 2, the widest since Bloomberg began compiling data in 1988. A basis point is 0.01 percentage point.

Swap rates are traditionally higher than Treasury yields in part because the floating payments are based on interest rates that contain credit risk, such as Libor.Three-month dollar Libor stayed today at 1.246 percent, its highest level in five weeks, according to the British Bankers’ Association. The overnight rate climbed one basis point to 0.31 percent. The dollar Libor-OIS spread, a gauge of demand for cash and willingness to lend, widened one basis point to 99 basis points. The spread, which reached a record high of 364 basis points on Oct. 10, averaged about 11 basis points for the 10 years prior to August 2007. “I would be increasingly concerned if the two-year swap spread continues to shoot up, toward 80 basis points,” said Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut. “Below 60 basis points is normal, so we need to go back in that direction.”

Eastern European banks, which are mainly subsidiaries of financial institutions such as Raiffeisen Zentralbank Oesterreich AG and Swedbank AB, are likely to come under “downward pressure” that may also weaken their parent companies, Moody’s wrote in a report released today in London. The MSCI World Index decreased 1.55 percent to 818.19 in London, extending its 2009 retreat to 11 percent. The MSCI Asia Pacific Index dropped 2.7 percent and Japan’s Nikkei 225 Stock Average lost 1.4 percent. The Standard & Poor’s 500 Index decreased over 3 percent. “There is a loss of confidence in the government’s ability to fix the problems” in the economy and credit markets, said Arthur Bass, a managing director of derivatives in New York at the brokerage Newedge USA LLC. “The continued breakdown in stock prices are also causing swap spreads to widen.”

Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face. According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers. They needed an alternative and found it in a previously considered initiative to pair private investments and public loans to try to buy the risky assets and take them off the books of banks. There was one problem: They didn't have enough time to work out many details or consult with others before the plan was supposed to be unveiled.

The sharp course change was one of the key reasons why Geithner's plan -- his first major policy initiative as Treasury secretary -- landed with such a thud last Tuesday. Lawmakers, investors and analysts expressed dismay over the lack of specifics. Markets tanked, and fresh doubts arose about the hand now steering the country's financial policy. Public acceptance of the plan suffered from several missteps, said sources involved in the decision-making or in close contact with those who were. The Obama administration, they said, failed to rein in the grand expectations built for the plan on Wall Street and in Washington, concluding that they would rather disappoint the markets with vagueness than lay out a lot of details they might have to change later -- a failing they saw in the Bush administration's handling of the crisis.

Meanwhile, the sources said, Obama's senior economic advisers were hobbled in crafting the plan by a shortage of personnel. To date, the president has not nominated any assistant secretaries or undersecretaries at the Treasury, and the handful of mid-level staffers who have started work were still finding their offices and getting their building passes and BlackBerrys. Moreover, the department made a strategic decision to limit input from the financial industry and other outsiders, aiming to prevent leaks and avoid a perception they were designing the plan for the benefit of big banks. But that also meant they were unable to vet their plan with the companies involved or set realistic expectations of what would be announced. Though Geithner had been in his job for only two weeks, he had been thinking about the problem of troubled assets since the credit crisis erupted 19 months earlier, first as president of the Federal Reserve Bank of New York and then, since November, as Barack Obama's pick to head the Treasury.

His predecessor atop Treasury, Henry M. Paulson Jr., had drawn political fire after he unveiled the Bush administration's $700 billion bailout program in September, facing accusations that the money had been spent erratically. Geithner, while still at the New York Fed, had been deeply involved in the discussions over crafting Paulson's program. The effort may have arrested a potentially devastating financial panic, but he sought to improve on its implementation by developing a more systemic plan for using billions of dollars, sources said. Quickly, discussions got underway. Geithner set a Feb. 9 date to release a plan, creating an artificial deadline meant to focus internal debate and prevent an overly prolonged period of what might come across publicly as indecisiveness.

At the center of the deliberations with Geithner were Lawrence H. Summers, chief White House economic adviser; Lee Sachs, a Clinton administration official likely to be named undersecretary for domestic finance; and Gene Sperling, another former Clinton aide. The debates among them were long and vigorous as they thrashed countless proposals and variations. Sometimes, Fed Chairman Ben S. Bernanke, Federal Deposit Insurance Corp. Chairman Sheila C. Bair and Comptroller of the Currency John C. Dugan joined in. The team concluded that the financial rescue effort would have to include several components. None would be more vital than an initiative for either removing or neutralizing the distressed assets on the banks of books -- many related to troubled mortgages -- so the banks would be freed to resume lending. Senior economic officials had several approaches in mind, according to officials involved in the discussions.

One would be to create an "aggregator bank," or bad bank, that would take government capital and use it to buy up the risky assets on banks' books. Another approach would be to offer banks a government guarantee against extreme losses on their assets, an approach already used to bolster Citigroup and Bank of America. As the first week of February progressed, however, the problems with both approaches were becoming clearer to Geithner, said people involved in the talks. For one thing, the government would likely have to put trillions of dollars in taxpayer money at risk, a sum so huge it would anger members of Congress. Officials were also concerned that the program would be criticized as a pure giveaway to bank shareholders. And, finally, there continued to be the problem that had bedeviled the Bush administration's efforts to tackle toxic assets: There was little reason to believe government officials would be able to price these assets in a way that gave taxpayers a good deal.

By Wednesday, Feb. 4, Geithner was leaning toward a different approach that his former colleagues at the Federal Reserve had developed months earlier, the source said. This involved a joint public-private fund to buy up the assets. Private investors, likely hedge funds and private-equity funds, would put up capital, and the government would loan money to the fund. If the private investors made wise decisions about which assets they bought, they would be able to pay back the government and make money for themselves. For the policymakers, the chief appeal of the public-private partnership is that it solves the problem of how to price assets. The private money managers who provide capital for the fund would decide which assets to buy, and at what price, taking government bureaucrats out of that difficult task.

Moreover, the private contribution lowers the total amount of money the government would need to put at risk. Also, the government would require private investors to incur any losses before the government does, reducing taxpayers' exposure to potential losses (but also potentially depriving them of any windfall profits). But there were multiple complications: How much government financing would be needed? What other incentives would be needed to get private firms on board? Where would the government get the money? What assets would the fund buy? Would the government have a say in which banks they're bought from? Might there be more than one fund? The clock was ticking. But Geithner wasn't ready to share his thoughts with senior government officials outside his narrow circle. He and his team worked on the plan through the weekend, with some of his staff working until 4 a.m. The team grew to about 20 officials, including lawyers, finance experts and public affairs staff.

One key element of the Treasury's new plan was to conduct "stress tests" of the 20 or so largest banks, figuring out what would happen to them if the economy worsens significantly more than most analysts forecast. The information gathered from that process could help shape the public-private fund, said an administration source. But many in the banking industry are unclear what information the government could access beyond that already available to bank regulators or to Geithner himself, who until recently had been the chief regulator of the country's largest banks as the head of the New York Fed. On Saturday, Feb. 7, the officials won a slight reprieve when the White House asked that Geithner's speech be postponed from Monday to Tuesday to allow Congress to focus a little longer on the on the massive economic stimulus package still pending. But there still was not enough time to sculpt the detailed plan that the financial markets expected. In the end, Geithner and his colleagues decided that it would be better to take flak for being vague than publicly offer half-formed details that might later have to be revised. And ambiguity, the officials concluded, would make the plan an easier sell on Capitol Hill, as congressional leaders could be brought into the discussions of details rather than be presented a detailed plan as fait accompli.

As Hillary Clinton visits Tokyo for her first trip as secretary of state, she will find a country in the midst of its worst recession in 50 years. Japan's economy is contracting across the board: Exports have cratered, industrial production is on track to plummet 30% from a year ago, and the Japanese government projects that GDP will drop 12% from last year. The world's second largest economy, Japan is also the largest holder of U.S. Treasury bonds. Recently, many economists and scholars in the U.S. have been looking backward to Japan's banking disaster of the 1990s, hoping to learn lessons for America's current crisis. Instead, they should be looking ahead to what might occur if Japan goes into a full-fledged depression.

If Japan's economy collapses, supply chains across the globe will be affected and numerous economies will face severe disruptions, most notably China's. China is currently Japan's largest import provider, and the Japanese slowdown is creating tremendous pressure on Chinese factories. Just last week, the Chinese government announced that 20 million rural migrants had lost their jobs. Closer to home, Japan may also start running out of surplus cash, which it has used to purchase U.S. securities for years. For the first time in a generation, Tokyo is running trade deficits -- five months in a row so far. The political and social fallout from a Japanese depression also would be devastating. In the face of economic instability, other Asian nations may feel forced to turn to more centralized -- even authoritarian -- control to try to limit the damage.

Free-trade agreements may be rolled back and political freedom curtailed. Social stability in emerging, middle-class societies will be severely tested, and newly democratized states may find it impossible to maintain power. Progress toward a more open, integrated Asia is at risk, with the potential for increased political tension in the world's most heavily armed region. This is the backdrop upon which the U.S. government is set to expand the national debt by a trillion dollars or more. Without massive debt purchases by Japan and China, the U.S. may not be able to finance the cost of the stimulus package, creating a trapdoor under the U.S. economy.

So far, Japan's politicians have been unable to find a way out of this mess. While another $53 billion stimulus package works its way through parliament, fully one-third of Japan's prefectures have instituted emergency economic stabilization measures. But the big issues elude short-term solutions. Though Japan's leaders are currently cutting back on military expenditures and domestic services, they're unable to agree on budgets or reform plans. They have no strategic road map for reining in the yen, opening up to international competition, or taking an economic leadership role in Asia that will promote growth and strengthen democratic, market-oriented societies.

Things don't have to turn out this way. If Japan's leaders can craft a monetary policy that ends Japan's deflationary spiral by carefully expanding the money supply, recommit to structural reform, and halt the yen's rise, they can jump-start economic growth. They should also ignore the powerful domestic agriculture lobby and embrace a robust free-trade agenda, which would help them as well as the rest of Asia. Mrs. Clinton's visit cannot be a simple photo opportunity. This trip needs to result in a clear U.S.-Japan approach to restoring confidence and rebuilding a robust and open international system. Without action, Japan and America may go over the cliff together, dragging Asia and the world down with them.

Heavy intoxication -- and an even heavier barrage of condemnation that followed -- cost Japan's finance chief his job Tuesday at a time when the world's No. 2 economy can hardly afford another misstep. Unemployment is climbing, spending is falling, and companies are seeing deep red as the global financial crisis takes a particularly heavy toll on this export-reliant nation. Last quarter, the economy shrank at its fastest pace in 35 years. The country's key stock index has shed 44 percent of its value over the past year. Yet taking center stage this week is fury and embarrassment over Finance Minister Shoichi Nakagawa's seemingly drunken performance at a recent G-7 summit in Rome.

Video footage of his final press conference shows the 55-year-old confused, drowsy and slurring his speech. The clip has been replayed over and over on Japanese TV and quickly circled the world via YouTube. Nakagawa tried to explain, denying that he was sloshed on the job. He blamed his bizarre behavior on cold medicine and jet lag. But friends and foes alike weren't buying it. Opposition lawmakers lodged a censure motion against Nakagawa and demanded he quit immediately. "He embarrassed himself in front of the world," said opposition leader Ichiro Ozawa. Fellow Cabinet member Seiko Noda called the clip "shocking." "A Cabinet minister must be fit, and he needs more self control," said Noda, Japan's minister in charge of consumer affairs.

In the end, the political hangover grew too big. Nakagawa resigned late Tuesday after earlier in the day saying he would stay on until parliament approves the budget for the fiscal year, probably in late April. "I decided that it would be better for the country if I quit," said a somber Nakagawa, one of Prime Minister Taro Aso's closest allies. The drama has further undermined Aso's already shaky grip on power and dealt a severe blow to his efforts to fight an ever-deepening recession. "He made a difficult choice, and I respect his decision," Aso said after accepting Nakagawa's resignation. Economy Minister Kaoru Yosano, 70, will add Nakagawa's duties to his current role, the premier said. Analysts described Nakagawa's sudden announcement as a futile attempt at damage control and said they don't expect Aso -- one of Japan's most unpopular leaders in history -- to last much longer.

"The scandal was so humiliating that Nakagawa's resignation will not be enough," said political analyst Minoru Morita. "The opposition will now shift their target to Aso, pushing him deeper into the corner." Tsuneo Watanabe, a fellow for the Washington-based Center for Strategic and International Studies, said Aso "totally botched" the situation. "He did not realize that mishandling of the Nakagawa scandal not only hurts his government and the party but also the Japanese economy," Watanabe said. The political gridlock expected in the weeks to come is likely to stall Japan's economic initiatives, already behind the curve compared with its Western counterparts. On Monday, Japan announced that its economy in the October-December quarter shrank at the quickest speed since the oil shock in 1974. Japan's economy has now contracted for three straight quarters and is almost certainly headed for a fourth.

To revive growth, Japan's parliament passed a contentious 4.8 trillion yen ($52.2 billion) extra budget in January that includes business tax credits and a cash payout of 12,000 yen ($133) per Japanese taxpayer. Aso has championed the idea, saying it will stimulate sagging consumer spending. But critics have panned the handouts as a lavish waste of public money with limited impact. The resulting political wrangling has delayed implementation of the stimulus measures, which still await parliament passage of some related bills. Nakagawa's resignation was expected to further embolden the opposition, which controls the upper house of parliament and could try to hold the bills hostage. Along with a moribund economy and increasing joblessness, the scandal was the latest in a series of embarrassments that have plagued Aso, who has been in office only since late September.

Aso's support ratings fell into the single digits in a recent national poll. The ruling party has tried to hold elections off and ride out the scandals. Several polls suggest that the opposition has a good shot at winning if elections are held soon, although the Liberal Democrats have controlled the government for virtually all of the past 54 years. Elections must be held by the end of September, but can be called at any time. "If elections were held right now, the opposition would win," said Takao Toshikawa, another political analyst. Which is exactly the stimulus that could boost at least one part of the economy. For investors, there is hope in Aso's looming political demise, said Yoshinori Nagano, senior strategist at Daiwa Asset Management in Tokyo "Stock prices tend to reflect the level of confidence in the Cabinet," Nagano said. "So with approval ratings so low right now, the market would be much better off if the Aso administration just dissolved."

German investor confidence jumped the most in more than 15 years in February after the government stepped up efforts to bolster the economy and the European Central Bank signaled it will cut interest rates to a record low. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations rose to minus 5.8 from minus 31 in January. That’s the biggest gain since July 1993 and the highest level since July 2007. Economists surveyed by Bloomberg News expected an increase to minus 25. ECB policy makers say they have room to cut borrowing costs further as the euro area battles its worst recession since World War II and retreating energy costs push down inflation. Chancellor Angela Merkel’s coalition on Jan. 12 agreed to spend about 80 billion euros ($102 billion) over two years to boost the German economy, the largest in the 16-nation bloc.

"We expected a significant improvement but the outcome is even better," said Ralph Solveen, an economist at Commerzbank AG in Frankfurt. "Analysts see that the current situation is catastrophic, that it can’t get any worse, and more and more people are expecting an improvement." ZEW said its gauge of current conditions fell to minus 86.2, the lowest reading in five years, from minus 77.1. "The economy isn’t past the trough," ZEW economist Sandra Schmidt said in a Bloomberg Television interview. "Developments will remain very weak for a couple of months." German gross domestic product slumped 2.1 percent in the fourth quarter of 2008 from the third, the biggest drop in 22 years. The economy will shrink 2.5 percent this year, according to the International Monetary Fund.

Daimler AG, the world’s second-largest maker of luxury cars, today reported its first quarterly loss since 2007. The Stuttgart, Germany-based company said it expects a global recession to erode sales this year and impose "further substantial burdens" on earnings. Infineon Technologies AG Chief Executive Officer Peter Bauer said on Feb. 12 Europe’s second-largest maker of semiconductors faces "many tough challenges" this year. Germany’s benchmark DAX stock index declined as much as 2.3 percent today, bringing losses to 10.8 percent this year. "We don’t expect to see much more than an economic stabilization in the second half," said Alexander Koch, an economist at UniCredit MIB in Munich. "The first quarter will still show an ugly economic performance. It’s clear that the ECB will continue to cut interest rates."

The ECB has lowered its key rate by 2.25 percentage points since early October to 2 percent, the most aggressive easing since the bank took control of monetary policy a decade ago. ECB council member Axel Weber said on Feb. 14 that the bank may "continue to use the room to maneuver on interest rates."Economists expect the ECB to reduce its benchmark to a record low of 1.5 percent at its next policy meeting on March 5. Crude oil prices have dropped more than 70 percent from a July peak of $147 a barrel, damping inflation and increasing consumers’ and companies’ purchasing power. Merkel’s stimulus program, which includes tax cuts and infrastructure investment, may also help revive the economy later this year. The spending boost amounts to about 1.6 percent of GDP. Deutsche Bank AG CEO Josef Ackermann said earlier this month that revenue at Germany’s largest bank rose "significantly" in January from a year earlier. "With all the appropriate caution, this gives us confidence for 2009," Ackermann said. "We are certain that Deutsche Bank will emerge from this crisis stronger."

The state’s manufacturers are enduring the worst business conditions in more than seven years, according to a key survey updated Tuesday. An index measuring current business conditions plummeted from January to February, reaching a value of -34.7 and smashing the previous record low by nine points. That’s according to the monthly Empire State Manufacturing Survey, conducted by the Federal Reserve Bank of New York and sent to 200 manufacturing executives around the state. A reading of zero indicates no gain or decline in activity over the previous month.

The index’s previous record was set in December 2008. Then, the index was nine points higher than the current month’s reading. An index gauging expectations of future business conditions dropped to a value of -6.6, the second-straight month the index had a negative reading. Last month was the first time the index dipped below zero since July 2001, when the survey began. In the survey, 41 percent of respondents said they expect conditions to worsen over the next six months, while 35 percent expect them to improve. The survey revealed that:

California, which is on the brink of running out of cash, will notify 20,000 state workers on Tuesday their jobs may be eliminated, a spokesman for Governor Arnold Schwarzenegger said on Monday. The announcement came a day after California lawmakers narrowly failed to pass a $40 billion budget that would have plugged the state's deficit with a mix of tax hikes and spending cuts. "In the absence of a budget, the governor has a responsibility to realize state savings any way he can," said Aaron McLear, a spokesman for the Republican governor. "This is unfortunately a necessary decision."

The layoff notices will affect about 20 percent of state workers, McLear said, adding the cuts would extend to every part of state government. The positions would be eliminated in June in preparation for California's next fiscal year, which starts in July. California, America's most populous state and the world's eighth biggest economy, has experienced a dramatic fall in revenues because of the housing downturn, rising unemployment and a sharp pullback in consumer spending. To conserve cash, the state has stopped public works projects, furloughed state employees for two days a month and postponed sending out tax refunds.

California lawmakers failed to reach agreement on how to eliminate a $42 billion budget shortfall as Governor Arnold Schwarzenegger prepares to shut down hundreds of public works projects and fire thousands of state workers. Senate President Darrell Steinberg, a Democrat, plans to lock lawmakers in the capitol unless they pass a $40 billion package of tax increases, spending cuts and bond sales today. The bills, backed by the Republican governor and by Democrats, remain one Republican vote short after round-the-clock negotiations over the three-day weekend. The floor debate is expected to start at 10 a.m. Sacramento time.

"We are dealing with a catastrophe of unbelievable proportions," said Senator Alan Lowenthal, a Democrat from Long Beach. "We cannot deny it any longer." California, a state that would rank as the world’s eighth- largest economy, is close to running out of cash because its tax collections have fallen amid the U.S. recession. It has already stopped paying income tax refunds and next month may be forced to pay bills with IOUs for the second time since the Great Depression unless a new budget is agreed. The budget proposal would raise the state sales-tax rate to 8.25 percent from 7.25 percent; boost vehicle license fees to 1.15 percent from 0.65 percent of the value of an automobile; add 12 cents to the per-gallon gasoline tax; reduce the dependant-care tax credit to $100 from $300 and impose a surcharge on income taxes of up to 5 percent.

Combined, the measures would raise taxes and fees by $14 billion, cut spending $16 billion and add $10 billion to the state’s debt. Another $2 billion in reserves would be created from funds moved on balance sheets. Steinberg said that if the measure doesn’t pass, he will lock senators in the capitol until an agreement is reached. "Bring a toothbrush," he said in a speech on the Senate floor late yesterday. "I will not allow anyone to go home, to resume their life, to have any kind of resumption of normal business" Lawmakers have been unable to agree on tax increases and spending cuts in four months of talks while economic conditions worsened. The state’s looming cash shortage and political stalemate has unnerved Wall Street.

Standard & Poor’s cut the rating on $46 billion of California’s bonds to A from A+, giving it the lowest credit rating of any U.S. state. California is one of just three U.S. states that requires more than a majority to pass a budget. That provision has empowered the Republicans, who hold enough power to block the two-thirds vote needed for passage. Republican lawmakers said higher taxes would hurt an already reeling economy. "Our state has been spending beyond its means for many years now," said Assemblyman Chuck DeVore, an Orange County Republican. "We’re asking the taxpayers of California for too much of their own money to cover over a problem of our own making."

Without a new budget in place, Schwarzenegger will notify 20,000 state employees today that they may lose their jobs, a step he put off taking last week as a deal seemed imminent. Tomorrow, he will shut down $3.8 billion of public works projects, including many already under construction, because the state doesn’t have enough money left to pay for them. That could jeopardize 32,000 jobs, Will Kempton, state director of transportation, said at a hearing today. The cost of mothballing those projects, for example covering trenches and holes already dug in roadways, would mean about $300 million of taxpayers’ money "will be flushed down the toilet," he said.

Kansas has suspended income tax refunds and may not be able to pay employees on time, the state's budget director said Monday. The state doesn't have enough money in its main bank account to pay its bills, prompting Democratic Gov. Kathleen Sebelius to suggest transferring $225 million from other accounts throughout state government. But the move required approval from legislative leaders, and the GOP refused Monday. Budget Director Duane Goossen said that without the money, he's not sure the state can meet its payroll. State employees are due to be paid again Friday. Goossen said the state stopped processing income tax refunds last week.

GOP leaders are hoping to pressure Sebelius into signing a bill making $326 million in adjustments to the budget for the fiscal year that ends June 30. Legislators approved that bill last week, but it has not reached her desk. Goossen said the state might also have to delay payments to public schools and to doctors who provide care to Kansans under the Medicaid program. The state has transferred funds before when it has been short of cash in its main bank account. Most recently, the state issued the special certificates required in July and December for transfers totaling $550 million. Each certificate requires the approval of the State Finance Council, which consists of the governor and eight top legislative leaders.

The council was scheduled to meet at 1 p.m. Monday, but Goossen said Sebelius canceled the meeting because Republican leaders told her they would not authorize the internal borrowing. Some Republicans question whether such borrowing would be legal. When the state issues a certificate, it must promise that the money can be paid back by the end of the fiscal year. But the state already is projected to have a deficit in the current budget. The legislation approved last week is designed to fix that. Goossen said Republicans told Sebelius they want her to sign that bill first. Senate Minority Leader Anthony Hensley, D-Topeka, called the tactic "blackmail."Republican leaders planned a news conference to discuss what happened.

The unsold cars and trucks piling up at dealerships and assembly lines as consumers cut back and auto companies scramble for federal aid are just one sign of a major problem hurting the economy and only likely to get worse. The world is suddenly awash in almost everything: flat-panel televisions, bulldozers, Barbie dolls, strip malls, Burberry stores. Japan yesterday said its economy shrank at an 12.7 percent annual pace in the last three months of 2008 as global demand evaporated for Japanese cars and electronics. Business everywhere are scrambling to bring supply in line with demand. Downsizing can be tricky, though. No one knows how much worse the economy will get, and while everyone waits for the recession to peter out, businesses are grappling with how to cut costs and survive without sabotaging their ability to grow when the economy picks up. And there is a lot to cut.

"There is over-capacity in everything," from "retail to manufacturing to housing," said Richard Yamarone, chief economist at Argus Research. "If capacity is too large, you don't need that many people employed, which is another reason we're seeing such high job losses." As long as capacity far outstrips demand, businesses have little reason to expand, buy new equipment or hire workers. Even if the government funds bridge repairs and banks step up lending, many industries still have to go through massive restructuring before growth can resume. But executives say they have to tread carefully. If they put off critical investments in technology or research for too long, they could hobble their recovery and even the economy's. Few industries have been as stung as severely by excess capacity as the U.S. auto industry, which produces millions more vehicles than it can sell. In 2008, there were enough automotive assembly plants in North America to churn out 18.3 million vehicles a year, according to the Center for Automotive Research. Analysts estimate that consumers this year will buy about 11 million. At current sales levels, it would take 116 days to sell all the cars and trucks clogging lots.

Automakers are scheduled to submit plans today outlining how they hope to restructure their operations to deal with a smaller marketplace, while still developing the new fuel-efficient cars that may be key to their future. Auto suppliers are also trying to figure out how to survive in the face of massive excess capacity globally. At its plant in Strasburg, Va., International Automotive Components, a Michigan-based supplier, secured wage and benefit concessions from workers in 2007 in hopes of staying competitive. But when Ford closed a factory in Norfolk, IAC had to lay off more than 200 workers, a third of the workforce in Strasburg. Since then, IAC has been able to line up more work for the plant. "The unfortunate thing is we know . . . it comes at the cost of other workers whose plants were unable to survive," said Karen Foster, president of United Auto Workers Local 2999, which represents the IAC employees at the affected plant.

There are echoes of the automakers' plight throughout the economy. Sandra Berg, chief executive of Ellis Paint in Los Angeles, an industrial paint and coating manufacturer, recently found herself confronting over-capacity head on. Her company had been growing steadily since 2000 and was able to hand out bonuses for 2008. The downturn started to affect business toward the end of last year. Then came January, and "we just slammed into a brick wall," Berg said. Since the new year, as sales have plummeted, Ellis Paint has announced two rounds of layoffs, imposed a hiring freeze and cut pay for management by 5 percent. The company has cut everywhere but sales, marketing, and research and development. "Our goal is to keep our expenses at the level of sales. I don't need to make a lot of money. I just need to break even . . . and look for the opportunities," Berg said.

Non-manufacturing sectors are trying to get rid of excess capacity as well. Retail chains such as Ann Taylor and Gap are closing stores after years of expansion, and others, such as Mervyns, are closing for good. "We've tremendously expanded the square feet of stores but not the number of yuppies occupying them," said Standard & Poor's economist David Wyss. Some analysts say over-capacity is so rampant that it will stymie government efforts to unfreeze credit markets. Banks have little reason to lend not only because they still have bad debt on their books but also because businesses don't have a pressing need to expand, said Mike Shedlock, an investment analyst with Seattle-based Sitka Pacific who writes the popular blog Mish's Global Economic Trend Analysis. "What is it that we need more of?" Shedlock said. "Do we need more Wal-Marts, more Pizza Huts, more nail salons?"

Strip malls and stores proliferated alongside housing developments, but many of those houses are empty; there were never enough people to fill them in the first place, and there won't be anytime soon. Harvard economist Edward Glaeser estimates that from 2002 to 2007, the country's housing stock increased by 8.65 million units, outpacing the number of new households, which increased only by 6.7 million over the same period. Taking into account a rise in the number of vacation homes, Glaeser estimates an overhang of about 1.3 million vacant units. Absorbing that excess, he said, could take an additional two years. Over-capacity in the housing industry has spilled over into countless other peripheral industries -- forcing cuts at chemical companies, home improvement stores and furniture manufacturers. The slump has prompted layoffs at PPG Industries, a leading paint company; Owens Corning, which makes roof shingles; and Therma-Tru, a door-manufacturing company. Therma-Tru recently moved up plans to close its plant in Fredericksburg later this year, citing "weaker-than-expected business forecasts."

Some businesses that were careful to manage inventories during the boom are facing a hard adjustment. Ben Anderson-Ray, who runs Hubbardton Forge, a small maker of high-end lighting fixtures in Vermont, said he's had to lay off 26 employees after initially cutting hours, even though he expanded the business steadily and his customers aren't stuck with massive quantities of unsold goods. For now, Anderson-Ray said, he has not scaled back work on new products; he simply cannot afford to do so. As one of the last lighting companies that manufactures its goods in the United States, Hubbardton Forge has survived in part because of its original designs and constant innovation. It cannot compete with overseas producers on price. "If our order rates improve, we have the capacity in place to come back," Anderson-Ray said. But if order levels fall further over the next few months, he may have to consider further cuts. "We are watching our orders every day," he said.

Some analysts see ending the credit crunch as soon as possible as critical to preventing lasting damage. Harvard economist Diego A. Comin, in his research on Japan's decade-long bout of economic stagnation in the 1990s, found that demand stayed low long enough that businesses didn't make necessary investments. Computer adoption rates, for example, slowed, as did productivity growth. Businesses lost ground to competitors in countries such as South Korea, which made it harder for Japan to emerge from its slump. Investing in new products and processes matters even more in highly competitive global industries plagued by over-capacity. "In China, during the boom, there was huge over-capacity in various lines of activity ranging from shoes and clothing, light manufacturing -- all of that stuff. So that is why from the perspective of U.S. companies, we have found it so important to be on the innovative edge," said Harvard business professor Joseph L. Bower. "The only way to create value is to be on the innovative, high-tech, fashion-forward side." If the credit crunch in the United States persists, "companies will find it difficult to invest in technology for a while, and then once the financial markets are back on track and demand recovers, companies will find themselves in a difficult position," Comin said. "Productivity growth will be declining for a while. They will have a hard time catching up."

It may seem like the country that used to make everything is on the brink of making nothing. In January, 207,000 U.S. manufacturing jobs vanished in the largest one-month drop since October 1982. Factory activity is hovering at a 28-year low. Even before the recession, plants were hemorrhaging work to foreign competitors with cheap labor. And some companies were moving production overseas. But manufacturing in the United States isn't dead or even dying. It's moving upscale, following the biggest profits, and becoming more efficient, just like Henry Ford did when he created the assembly line to make the Model T. The U.S. by far remains the world's leading manufacturer by value of goods produced. It hit a record $1.6 trillion in 2007 -- nearly double the $811 billion in 1987. For every $1 of value produced in China's factories, America generates $2.50.

So what's made in the USA these days? The U.S. sold more than $200 billion worth of aircraft, missiles and space-related equipment in 2007. And $80 billion worth of autos and auto parts. Deere & Co., best known for its bright green and yellow tractors, sold $16.5 billion worth of farming equipment last year, much of it to the rest of the world. Then there's energy products like gas turbines for power plants made by General Electric, computer chips from Intel and fighter jets from Lockheed Martin. Household names like GE, General Motors, IBM, Boeing, Hewlett-Packard are among the largest manufacturers by revenue. Several trends have emerged over the decades:

America makes things that other countries can't. Today, "Made in USA" is more likely to be stamped on heavy equipment or the circuits that go inside other products than the TVs, toys, clothes and other items found on store shelves.

U.S. companies have shifted toward high-end manufacturing as the production of low-value goods moves overseas. This has resulted in lower prices for shoppers and higher profits for companies.

When demand slumps, all types of manufacturing jobs are lost. Some higher-end jobs -- but not all -- return with good times. Workers who make goods more cheaply produced overseas suffer.

Once this recession runs its course, surviving manufacturers will emerge more efficient and profitable, economists say. More valuable products will be made using fewer people. Products will be made where labor and other costs are cheaper. And manufacturers will focus on the most lucrative products. Aircraft maker Boeing announced last month it was cutting about 10,000 jobs. At the same time, workers are streamlining the wing assembly for the 737, the company's best-selling commercial plane, said Richard McCabe, a wing line mechanic for 10 years and former Machinists union shop steward. He and his co-workers at the factory in suburban Renton, Wash., were asked about 3 1/2 years ago to figure out how to switch from building wings in massive stationary jigs mounted vertically, "the way things have been done here forever," to "one-piece flow," assembling them horizontally on a moving line similar to automobiles. The new process is set to begin by the end of the year.

"I won't go to the wing. The wing will come to me," McCabe said. "It's going to save them millions in scrap and rework." McCabe said there was a lot of initial resistance on the shop floor, but Boeing's increased outsourcing -- including wing production for the new 787 to Japan -- helped change workers' minds. "I told the guys, it's development or die," McCabe said. "If we can get this done, it assures us the future." About 12.7 million Americans, or 8 percent of the labor force, still held manufacturing jobs as of last month. Fifty years ago, 14.6 million people, or 28 percent of all workers, toiled in factories. The numbers -- though painful to those who lost jobs -- show how companies are making more with less. Still, the perception of decline is likely to grow as factories and jobs vanish, and imports rise for most goods we buy at stores.

Thirty years ago, U.S. producers made 80 percent of what the country consumed, according to the Manufacturers Alliance/MAPI, an industry trade group. Now it's around 65 percent. American factories still provide much of the processed food that Americans buy, everything from frozen fish sticks to cans of beer. And U.S. companies make a considerable share of the personal hygiene products like soap and shampoo, cleaning supplies, and prescription drugs that are sold in pharmacies. But many other consumer goods now come from overseas. In the 1960s, America made 98 percent of its shoes. It now imports more than 90 percent of its footwear. The iconic red Radio Flyer wagons for kids are now made in China. Even Apple Inc.'s iPod comes in box that says it was made in China but "designed in California." "Some people lament the loss of manufacturing jobs we could have had making iPods. So what?" said Dan Ikenson, associate director of the Center for Trade Policy Studies at the libertarian-leaning Cato Institute. "The imports of iPods support U.S. jobs," including engineers, marketers and advertisers.

Some U.S.-made products are hiding in plain sight. Berner International Corp., based outside Pittsburgh, doesn't make the clothes, dishes or sponges sold at Wal-Mart, but its products hang above shoppers' heads as soon they come through the sliding doors. The company's 60 employees make air curtains -- rectangular blowers mounted to the ceiling that keep out hot or chilly air, insects and dust while keeping in A/C and heat. Also called air doors, they hang from ceilings at Wal-Marts, Whole Foods, and Starbucks, and above the big factory doors at Ford and Toyota car plants. Chief Executive Georgia Berner keeps her company in the United States because she relies on her staff's deep knowledge of air blowers, which are custom made for clients using metal plates, fans, motors and electronic parts assembled at the company's 60,000-square-foot factory. Each box requires specific voltages and sizing, she says.

"I have a crew here (with) much of the product knowledge in (their) heads," she said. To deal with the recession, her production manager is making the factory more efficient by moving shelves of parts closer to workers. She's also banking on a new line of air curtains for fast food drive-through windows, noting that fast food demand is on the rise while other restaurants decline. Other companies saddled with high labor costs -- sometimes called legacy costs that insured workers high wages, pensions and handsome benefits -- can struggle to survive. In the early 1980s, the U.S. steel industry faced such pressure. Today, it's the auto industry, which is pressuring its unions to agree to deep reductions in pay and generous benefits. In fact, it's a condition of the $17.4 billion in emergency loans from the government to keep the industry in business.

But other American manufacturers -- and workers -- have adapted. Judy Horkman, 47, of Manitowoc, Wis., was devastated when she was laid off after 13 years of attaching handles to saute pans on the Mirro Cookware plant assembly line. But two years ago, Horkman took a job making industrial light fixtures for office buildings and warehouses at Orion Energy Systems Inc. She makes $12.50 per hour -- not quite the $13.80 she earned at Mirro, but Horkman says she is fine with that. Horkman said she takes tremendous pride in her work. When she assembled cookware she imagined that she would personally use the final product. When she switched to making lighting, she was driven by the same Golden Rule. "Regardless of my product I'd put my heart into it. I put my hard work, my dedication, my quality into whatever I make," she said. "I just imagine someone out there really needs this, and I think about how good I'd want it to be if it was for me."

It’s a jobs-creation program. No, it’s investment in our future. It’s a tax-relief plan. Wait, it provides assistance to consumers hardest hit by the economic recession. It’s legislation to jump-start the economy. No, it’s a recovery program. It’s a life raft for state and local governments. It’s a spending bill. Which is it? Fiscal stimulus is all things to all people. In other words, it represents the triumph of faith over reason.

When I first learned about fiscal stimulus according to John Maynard Keynes in an introductory economics course, it made a modicum of sense. The idea was that at times when the private sector isn’t pulling its weight, the government can step in and spend instead. It doesn’t take an inquiring mind very long to find the flaw in the argument. How exactly does the government get the money to pay for its spending? Neither borrowing (today) nor taxing (tomorrow) increases aggregate demand. All they do is transfer the ability to spend from one entity to another and the timing of that spending from the future to today.

In the short run, the economy will get some boost from hundreds of billions of dollars in government spending. What about the long run? (Please don’t say we’re all dead.) One dollar of federal borrowing means one dollar unavailable for the private sector. Advocates of fiscal stimulus would have us believe the government is Santa Claus, delivering gifts to those who are nice without extracting anything from those who are naughty. Economic modelers say with absolute certainty that every $1 spent by the government translates into $1.47 or $1.50 or $1.63 of gross domestic product. The specificity of these forecasts -- down to the last penny -- doesn’t do much to convert the atheists among us. The same models that didn’t see a recession until it was under way are now specialists in human psychology?

Besides, where’s the proof that fiscal stimulus delivers? "Empirically, nobody can point to a single Keynesian episode that worked," says Dan Mitchell, senior fellow at the Cato Institute, a libertarian think tank in Washington. Attempts to spend their way out of a slump by Herbert Hoover, Franklin Roosevelt, George W. Bush, Japan (in the 1990s) and Europe yielded little in the way of results, Mitchell says. "The only thing Keynesians have ever been able to point to that worked was World War II," which isn’t something we want to repeat. Left to its own devices, the economy’s natural tendency is to grow. That may sound like a cliche, but it’s true.

When this recession ends, and it will, we won’t know the reasons why. Was it the Fed’s aggressive easing, cutting its benchmark rate to almost zero and inflating its balance sheet? Maybe it was the banking system’s return to health, either because of or in spite of the government’s interventions, that got the economy moving. That was certainly the case in the early 1990s, following the savings and loan crisis, which saw the industry shrink by one-half. Or maybe it was the passage of time, the great healer of all wounds. Perhaps fiscal stimulus played a role. If so, which parts of the program were responsible? The tax cuts? The increase in automatic stabilizers, such as unemployment insurance and food stamps? Was it infrastructure spending? Investment in education? Weatherizing government buildings?

This isn’t an exact science, which is why the debate about fiscal spending can’t be settled to the satisfaction of the believers or deniers. In theory, it’s hard to see how it can produce any long-run benefits. Before you get too depressed about adding trillions of dollars to your children’s tax liability, consider the following: There is an entity that can spread pixie dust on the economy and enable it to fly. It’s called the central bank. Fiscal policy gets its bang from monetary policy, says Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago. "If the goal is to stimulate aggregate demand, fiscal policy always needs monetary policy," he says.

In the current environment, with banks unable to perform their function of creating credit, "monetary policy needs fiscal policy to stimulate demand," he says.Of course, the "by-product" of the Fed’s monetization of the Treasury’s debt is inflation, Kasriel says. But that’s tomorrow’s problem. Kasriel advises not to get sidetracked by debates about the relative productivity of pork, by claims that "my pork is more stimulative than your pork." All pork, all spending, "increases aggregate demand if the Fed underwrites it," he says. Without the Fed, fiscal policy is "just redistributing spending from one group to another."

Just to recap: There is no Santa Claus. The federal government can’t give something to one person without taking it away from someone else, either today or at some point in the future. There is a tooth fairy. It’s called the Federal Reserve. The Fed has pixie dust. It’s called a printing press. Unlike the fiscal authority, the Fed has the gift that keeps on giving.

What a joke. Your Congress has voted to spend almost $790 billion of your money on a stimulus package that not a single member of either chamber has read. The 1,073-page document wasn't posted on the government's Web site until after 10 p.m. the day before the vote to pass it was taken. I don't care if you're Evelyn Wood, you can't read almost 1,100 pages of the lawyer talk that makes up all legislation in eight or 10 hours. The criminal part of this boondoggle is divided into two parts. The first is the Democrats promised to post the bill a full 48 hours before the vote was taken to allow members of the public to see what they were getting for their money. Both parties voted unanimously to do this ... and they lied. It didn't happen. Why am I not surprised? Congress lying to the American people has become part of their job description. They can't be trusted on anything anymore.

I'm sure part of the reason there was no time for the public to read the bill was the 11th-hour internecine warfare between House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid. When Reid first announced the compromise had been reached, Nancy Pelosi was nowhere to be seen. And it would take an act of God for this egotistical, arrogant woman to miss a photo op where she could take credit for anything. But she wasn't there. She summoned Reid to her office, where unnamed sources said she blew her top over some provision for schools that she wasn't happy with. Pelosi's snit delayed everything. It's really too bad President Obama couldn't figure out a way to jettison these two who are poster children for everything that is wrong in Washington. The Associated Press called the birth of the stimulus bill "sausage making" in the best tradition of Washington politics as usual.

The second part of the crime is the contents of the bill itself. Far from being only about jobs, infrastructure and tax cuts as promised, the stimulus bill stimulates a bunch of other stuff as well. Eight billion dollars for high-speed rail lines, including a proposed line between Las Vegas and Los Angeles. This little bit of second story work wasn't even in the House version of the bill. It started in the Senate as a $2 billion project, and came out of the conference committee costing a whopping $8 billion. Gee, now who would that benefit? Oh yeah, the Senate majority leader is from Nevada. Filipino veterans, most of whom don't live in the U.S., will get $200 million in compensation for World War II injuries. And: $2 billion in grants and loans for battery companies, $100 million for small shipyards and a rollback of the alternative minimum tax at a cost of some $70 billion.

The AMT provision is much-needed legislation, but it doesn't belong in the stimulus bill. It forced other things out so Congress could keep to its self-imposed $800 billion cap. And when it comes to the tax cuts contained in the stimulus bill, experts have determined they will amount to about $13 per week after taxes for the average American. I'm not sure how much stimulation $13 a week buys. It depends on the neighborhood. The biggest problem of all is the stimulus bill may not be nearly enough. And if the president has to come back asking for more, the next time might not be so easy. So far, we have an anemic stimulus bill and some sort of vague proposal from the secretary of the Treasury to deal with the banking crisis -- a proposal that landed with a thud last week -- as the two first steps toward solving a financial crisis that is threatening to take down the country. Obama better step up his game, or it's going to be a short four years in office.

Barack Obama would have made one hell of an economics professor. This week, he's given wonderfully detailed explanations about how we got into our economic woes and how to get us out of trouble. The problem, of course, is that he's president of the United States, not a teacher in some community college. Obama's performance has been stellar from one point of view. In a news conference and various town-hall appearances, he's directly addressed the major criticisms of his proposal to jolt the economy out of this recession with a massive tax cut and spending bill. In extreme detail, using facts and logic, he pretty much demolished all the opponents' arguments that it's wrong to try to fix the economy by cutting taxes and spending money. Obama is obviously benefiting from his daily economics tutorial with Larry Summers and Jared Bernstein. But he's failed by another measure. By speaking in complete paragraphs with nuanced thinking, he hasn't given the American people what they crave: The short answer.

I'm not saying people are too stupid or lazy to follow Obama's logic. I'm saying that they need symbols to help them organize their thinking about complex issues. Framing an issue with a slogan is often the key to success. Do you think we would have willingly spent billions on the space program if John F. Kennedy hadn't, in the early 1960s, dramatically committed the nation to "landing a man on the Moon and returning him safely to the Earth" before the decade was out? Yes, he can? Obama himself knows this very well. Why do you think he kept repeating "Yes, we can" throughout the campaign? The phrase is shorthand for his optimistic and empowering view that there's nothing wrong with America that can't be solved by harnessing the energy, initiative, enthusiasm and grit of the American people. Besides, "Yes, we can" is fun to chant.

The Republicans know this, and have become experts in political symbolism. They've changed the terms of the debate in Washington about dozens of issues by changing the symbolism. The estate tax enjoyed almost universal support until Republicans managed to change its name to the "death tax." Republicans have persuaded many that the 7.4% taken out of each and every dollar earned by working Americans isn't a "tax" at all. And they've had success with their bizarre claims that government jobs aren't jobs and that government spending doesn't stimulate the economy. I wouldn't want Obama to emulate the Republicans' success too much. He shouldn't insult our intelligence. But he could do with a few more slogans, and a few less long-winded answers. Obama would have had more success with the stimulus plan if he'd sold it with some catchy phrases, suitable for a bumper sticker.

How about 'back to work'? Why not say the plan will "put America back to work"? After all, that is the essence of almost everything he's trying to do. Instead of saying: "Most economists almost unanimously recognize that, even if philosophically you're wary of government intervening in the economy, when you have the kind of problem we have right now -- what started on Wall Street, goes to Main Street, suddenly businesses can't get credit, they start paring back their investment, they start laying off workers, workers start pulling back in terms of spending -- that, when you have that situation, that government is an important element of introducing some additional demand into the economy." Why not say: "Put America back to work." Instead of saying: "I visited a school down in South Carolina that was built in the 1850s. Kids are still learning in that school, as best they can. It's right next to a railroad. And when the train runs by, the whole building shakes and the teacher has to stop teaching for a while. The auditorium is completely broken down; they can't use it. So why wouldn't we want to build state-of-the-art schools with science labs that are teaching our kids the skills they need for the 21st century, that will enhance our economy, and, by the way, right now, will create jobs?" Why not say: "Rebuild America."

If Obama's is too verbose, his Treasury secretary has the opposite problem. The main criticism of Tim Geithner's plan to get credit flowing through the economy was that he didn't give enough details. Geithner's plan was long on acronyms, but short on specifics. Frankly, we're tired of bumper-sticker solutions to the financial crisis, replete with countless programs. We've had Help for Homeowners, Hope for Homeowners, the Hope Now Alliance, FHA Secure, the Term Auction Facility, the Term Securities Lending Facility and the Temporary Liquidity Guarantee Program. There's also been the Primary Credit Dealer Facility, the Term Asset-Backed Securities Loan Facility, the Money Market Investor Funding Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Troubled Asset Relief Program and the Capital Assistance Program. Now we get the Financial Stability Plan, which includes the Financial Stability Trust, the Public-Private Investment Fund and the Consumer & Business Lending Initiative. And soon, we'll have the Small Business and Community Bank Lending Initiative. How about this, Tim: "Just Fix the Damn Thing."

It's Wall Street against Big Labor as GM and Chrysler hint at Chapter 11 filings to frighten creditors and workers into discounting debt. On the eve of a deadline to submit its viability plan to the U.S. Treasury, General Motors (GM) and Chrysler executives continued scrambling on Feb. 16 to cut a deal that would restructure both labor costs and debt. If the companies don't show that they are viable in the long run, the government could refuse to give either one additional money. Without help from the government, Chapter 11 bankruptcy is a real option. But getting all sides to agree is tough. GM said in December that it wants its bondholders to take 30¢ on the dollar for their GM debt and receive stock to make up for the rest.

GM also wants to give a United Auto Workers-led trust fund half the value of $21 billion in obligations in cash and the rest in stock. Both the union and a committee of GM bondholders want the other creditor to make big concessions. "It will be a face off between the union and bondholders with GM in the middle," says David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. Bondholders are unhappy that they are being offered 30% on their bonds while the union is being offered 50% on its debt. The UAW is wary of taking too steep a cut on the cash portion of the so-called VEBA, or Voluntary Employee Benefits Association Trust. The trust fund is supposed to be set up next year with $36 billion in GM cash and bonds to pay for retiree healthcare for some 80 years. But with GM short of cash, the company can't afford to fund the trust. So the company wants the UAW to take $10 billion in cash and the rest in equity for the remaining $20 billion the company owes.

To satisfy Treasury Secretary Timothy Geithner and Lawrence Summers, one of President Barack Obama's chief economic advisors, GM will have to placate both the UAW and the bondholders. Officially, GM has said only that it is talking to all parties. Privately, GM executives say that they will probably not have everything done by the Tuesday deadline. That may be just fine. The new task force—which is headed by Geithner and Summers but includes members from such other departments as Commerce, Energy, Transportation, Labor, and the Environmental Protection Agency—will probably not make a final decision on funding this week. If they don't think the automakers' plans go far enough, the task force could ask all parties to get back to negotiating a deal that restructures GM and Chrysler. Thus the Feb. 17 deadline is more likely to start the process of restructuring the two companies. "I highly doubt that the President set up a task force to vote up or down this week," says Rep. Thaddeus McCotter (R-Mich). "This is a first important step in what will be the start of the process between all stakeholders."

Meanwhile, sources say that GM has looked at the possibility of a bankruptcy filing. But executives say that the company still views that as a last-ditch move. The prospect could also be used as leverage with bondholders, some of whom want to hold out for a better deal than GM has offered. Ultimately, Cole says, "the bondholders are going to have to play." It's easy to see why. GM had somewhere around $12 billion in cash before borrowing $9.4 billion from the government. Even if the company still had the $21.4 billion in cash, unsecured creditors stand behind $11.8 billion in secured debt and the government loans. Plus a bankruptcy judge would order the company to pay suppliers first. That could leave bondholders begging in bankruptcy.

But do they believe that GM will go bankrupt? The government will want to avoid that, says IHS Global Insight analyst Aaron Bragman. It would cost more than $100 billion to put workers on unemployment benefits and draw on other social programs should GM fail, says Bragman. The bondholders know this and may use it as bargaining power to ask for more than 30 cents on the dollar. "It may simply be a tactic to try to get the UAW and the company's bondholders back to the negotiating table, Bragman says. To get a deal done, GM and Treasury officials will have to convince the bondholders that the threat of Chapter 11 is real.

President Barack Obama’s chief spokesman said the administration can’t rule out a restructuring through bankruptcy for struggling automakers, while adding the industry is "tremendously important" to the economy. White House press secretary Robert Gibbs said the administration won’t "prejudge" the next steps for General Motors Corp. and Chrysler LLC until the automakers present their own plans under terms of a government aid package. "I wouldn’t preclude policy choices, particularly since we haven’t seen details," Gibbs told reporters traveling with the president today to Colorado. The auto companies "represent a huge part of our manufacturing base, and to have a strong and viable auto industry is tremendously important for the future."

GM and Chrysler must submit a report today on progress in cutting labor and debt costs worldwide to keep $13.4 billion in U.S. government aid. GM may seek support beyond an $18 billion request made Dec. 2 because of worsening economic conditions, people familiar with the automaker’s plan said. Chrysler has said it needs at least $3 billion in addition to $4 billion it received. Obama has decided against naming a "car czar" to oversee a revamping of the auto industry. Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers instead will head a task force that will evaluate the plans submitted by GM and Chrysler. Obama will be in Denver this afternoon where he will sign the $787 billion economic stimulus bill passed by Congress last week and highlight the energy development components of the legislation.

General Motors Corp. and Chrysler LLC, already relying on government aid to survive, take their case to the U.S. Treasury today that they can undo past mistakes and justify more U.S. aid to return to profit. GM, with a pledge for $13.4 billion in loans, may seek support beyond an $18 billion request made Dec. 2 because of worsening economic conditions, people familiar with the automaker’s plan said. Chrysler has said it needs at least $3 billion in addition to $4 billion it received last month.

"Have they made mistakes? You bet they have," former President Bill Clinton said yesterday at an environmental- building conference in Burbank, California. "Has the union made mistakes? Of course. But also the world changed, and frankly the political system kept ratifying the status quo for them. And I’m not pointing fingers. I was a part, we all have been." A final plan due March 31 will determine whether government support for the U.S. industry continues or if President Barack Obama’s administration may need to force the companies into bankruptcy to complete the restructuring.

The GM board in a phone call yesterday discussed the latest version of the report, which is about 100-pages long and is due to be submitted this afternoon, people familiar with the situation said. Discussions with the United Auto Workers union were continuing late last night, they said. GM and Chrysler must show progress in getting creditors and the UAW to accept equity in place of billions of dollars in scheduled cash payments. The automakers must also ensure that future models will meet environmental rules that may require $100 billion in new technology.

"Everyone has a lot at risk," said Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Michigan. "If the UAW doesn’t provide concessions, and the union forces GM’s hand and they go into bankruptcy, it will be the end of the UAW as we know it." The progress report will be evaluated by Treasury Secretary Tim Geithner, White House economic adviser Lawrence Summers and a new automotive task force. The Obama administration created the panel rather than use a single "car czar" to supervise the federal loans, which were authorized by then-President George W. Bush’s Treasury Department Dec. 19.

Steven Rattner, co-founder of private-equity firm Quadrangle Group LLC, who had been considered for the auto czar position, may still join the government’s effort, said a person familiar with the situation. GM is to receive $4 billion today, as scheduled, said a person familiar with the matter. The administration may give more money to the automakers if they demonstrate they can repay the loans, Geithner said in a Feb. 10 CNBC interview. It’s unlikely GM and Chrysler will have complete agreements today with creditors or unions, said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan.

"This will lead into kind of a 4-way discussion between the government, the companies, the union and the bondholders," said Cole, whose father was a GM president. "They are still working on parts of this." GM remains focused on reorganizing outside of bankruptcy, people familiar with the plans said this weekend. The automaker continues planning for the contingency as a last resort, the people said. GM spokesman Tony Sapienza declined to comment yesterday on the status of the talks. Closely held Chrysler, controlled by Cerberus Capital Management LP, also continued to meet with the UAW and creditors about cost cuts with a goal of meeting the deadline, spokeswoman Shawn Morgan said.

The terms of the Dec. 19 loan agreements from the U.S. Treasury require GM and Auburn Hills, Michigan-based Chrysler to convince the UAW to accept equity instead of cash for half of next year’s scheduled payments into a union-run retiree health- care fund. The UAW walked out on GM talks Feb. 13 in a dispute over the proposal. " I’d be willing to entertain eliminating their legacy costs," Clinton said yesterday, referring to retiree medical coverage and similar expenses. "You’ve all heard the old saw that General Motors is a health-care company that produces cars on the side to try to defray some of its costs." UAW President Ron Gettelfinger has said he’s willing to make additional concessions to help the automakers avoid bankruptcy if auto executives, debt holders and others also sacrifice.

GM said last week it will fire 10,000 of 73,000 salaried workers globally and cut the pay of many who remain. The automaker also is seeking to shed 1,700 of its 6,400 auto dealers. Chrysler is also seeking savings from dealers and suppliers. In separate talks, GM and its bondholders are working to craft a debt exchange that gives investors who participate greater security and more seniority so that enough take part, a person with direct knowledge of the talks said this weekend. GM needs to cut two-thirds of its $27.5 billion in unsecured public debt to $9.2 billion as required by the U.S. government. "I think they are going to be burning the midnight oil," Virag said. "It’s anyone’s guess what’s going to happen."

The German government is considering taking a stake in General Motors subsidiary Opel to prevent mass layoffs expected to be part of the American automobile giant's looming restructuring. Trade unions are calling for a spin-off, but the issue has sparked a political row. Germany's political parties are embroiled in a row about whether the government should take a stake in carmaker Opel, which faces possible mass redundancies and plant closures under a global restructuring by its parent company General Motors due to be presented later on Tuesday. The labor leaders of GM's European subsidiaries -- Opel, Vauxhall in Britain and Saab in Sweden -- on Monday demanded a spin-off of their brands rather than face what they called potentially fatal cost-cutting in Europe by GM. "The spin-off of Opel/Vauxhall ... and the spin-off of Saab is the only reasonable and feasible option for General Motors which would not destroy the European operations and its European assets and could avoid lawsuits," said a statement on the labor force's Web site.

GM, recipient of a US government bailout, has a Tuesday deadline to present a plan to the US government on how it plans to remain viable. "The current plan could include for the Opel/Vauxhall brand and the GM/Opel/Vauxhall subsidiaries mass dismissals and probably several plant closures. This would have disastrous consequences for the GM brands and companies in Europe and will finish them off," the statement said. Reports on Monday said the German federal government and several regional governments are considering acquiring a stake to shore up Opel. German Deputy Chancellor and Foreign Minister Frank-Walter Steinmeier, the center-left Social Democratic Party's (SPD) nominee for the chancellorship in the September general election, didn't rule out a government stake to rescue Opel. "I agree with the partners at Opel that we must review all options to save jobs at Opel in Europe and Germany," Steinmeier said on Monday. German Finance Minister Peer Steinbrück stressed that the government could only provide short-term help. Apart from a spin-off from GM and a government stake, other options being considered are state loan guarantees to keep the carmaker going.

Opel employs around 26,000 people in Germany at plants in Rüsselsheim, Bochum, Kaiserslautern and Eisenach. The potential job losses from plant closures are much higher than that if components suppliers are included. While politicians from the SPD and the opposition Greens said they were open to a possible state involvement in Opel, several prominent members of Chancellor Angela Merkel's conservative Christian Democrats (CDU) and of the opposition business-friendly, liberal Free Democrats (FDP) said they were strictly opposed to it. "I'm strictly against the state taking a stake in Opel. What would we then do if Ford or BMW were to ask for help tomorrow?" asked CDU member of parliament Michael Fuchs. Rainer Brüderle of the FDP, which shares power in the regional governments of North Rhine-Westphalia and Hesse, the states with the two biggest Opel plants, told Berliner Zeitung that it wasn't the government's job to build cars. Opel started building cars in 1898 and the Opel family sold a majority stake to General Motors in 1929 during the world financial crisis. Now, with General Motors about to launch a restructuring which is widely expected to cause heavy job slashing in Europe, there are growing calls for it to return to German ownership.

The parliamentary leader of the Greens, Fritz Kuhn, called for a temporary government stake in Opel. "It would be tragic if an automotive dinosaur like GM would tear a modern company like Opel into the abyss," Kuhn told the Westdeutsche Allgemeine Zeitung newspaper. "If Opel continues the ecological modernization of its product range, the company will become competitive on its own." However, several analysts said they doubted GM would agree to spin off Opel. "The businesses are very closely intertwined," said one auto analyst. In Rüsselsheim, for example, there are several thousand engineers responsible for the global development of models. Without GM, that developmeent center would have to be cut back severely. Ferdinand Dudenhöfer, an economist at the University of Duisburg/Essen who specializes in the auto industry, said Opel would only be worth between €1 billion ($1.28 billion) and €3 billion ($3.8 billion) if it were separated from GM.

He told Berliner Zeitung that the German government had waited too long before responding to the problems at Opel/GM. "Legally, a spin-off could have happened swiftly if they had started preparing it sooner," Dudenhöfer said. Separately, carmaker Daimler reported a steep drop in earnings for 2008 on Tuesday. Its net profit fell to €1.4 billion from €4 billion. Its operating profit, which fell to €2.7 billion from €8.7 billion, fell far short of average analysts' expectations for a figure of €4.4 billion. Daimler blamed the drop mainly on costs resulting from its remaining 20 percent stake in US automaker Chrysler. Earnings from Mercedes car and truck sales also declined. Daimler declined to give a forecast for 2009 and announced a cost-cutting program involving curbs in wage hikes.

Citigroup’s quest to raise cash by selling assets is falling flat as would-be suitors have more interest in the parts of the business that Citi would like to keep, the New York Post said on Tuesday. One potential investor is Texas billionaire Gerald J. Ford, who is interested in buying back bank assets and branches that make up the former Golden State Bancorp which Citi bought from Mr. Ford seven years ago for nearly $6 billion, the paper said, citing sources. Potential buyers are also interested in Mexican bank Banamex, which Citi bought for $12.5 billion eight years ago, the newspaper added. Citigroup spokesman Jon Diat said last week Citi had no intention of selling Banamex, which it sees as a key component of Citicorp.

The assets that make up Citi’s so-called bad bank, businesses seen as non-core and at the heart of a strategy to raise much-needed capital, are garnering little interest, the paper cited investment bankers as saying. The assets include CitiFinancial, CitiMortgage and Primerica, which has been for sale for more than a year, the newspaper said. Those businesses are not drawing buyers because they are in sectors facing the strongest headwinds, the paper said, citing sources. Citigroup is splitting into two operating units in what is known as a "good bank/bad bank" strategy.

The deepening recession spells trouble for a little-known government corporation that insures the pensions of 44 million workers and retirees. The Pension Benefit Guaranty Corp. already has an $11 billion deficit that seems sure to grow larger as Corporate America suffers through the worst economic crisis since the Great Depression. With companies reporting shortfalls in their pension funds, it's all but certain that the PBGC will be forced to take over the pension plans of a rising number of bankrupt businesses. That means more red ink at the corporation before things possibly can improve. The future financial health of the agency is hard to forecast. It is hinged on interest rates, the length of the recession and the PBGC's own luck in playing the market, where it has billions invested.

The agency has $63 billion in assets. But it is obligated to spend $74 billion on pension benefits in the coming years. The PBGC might have time to rebound, but over the long term it might become insolvent and require a bailout. "Someday -- probably more than 20 years from now -- there's a significant chance that somebody is going to have to pay the piper," said former PBGC Director Charles E.F. Millard, a Bush administration appointee who stepped down on Jan. 20 when Barack Obama became president. "In the near- to medium-term, there will be no need for a bailout of PBGC." The PBGC quietly operates in a brick office building a few blocks from the White House. Its fate is important to the workers covered by the more than 29,000 employer-sponsored benefit pension plans it insures, and to all taxpayers who could be asked to foot the bill if its financial picture worsens down the road.

Congress created the PBGC in 1974 to guarantee the retirement security of workers covered by defined benefit pension plans. These traditional plans, which pay a specified monthly benefit at retirement, are being phased out as companies turn to 401(k)-style programs that require workers to make contributions and shoulder investment risks. The PBGC, which receives no tax dollars, gets its money from premiums paid by companies that sponsor the pension plans, along with revenue from its investments. The corporation's balance sheet has taken heavy hits in recent years. Nine of the 10 largest pension plan terminations in PBGC's history, including United Airlines, Bethlehem Steel and Kaiser Aluminum, have occurred since 2001. When a plan is terminated, the PGBC takes over and pays benefits to the retired workers. But they might not get the full amount that their employer promised. The maximum guaranteed amount currently is $54,000 a year for a person retiring at age 65.

Some pension experts shrug their shoulders at the PBGC's $11 billion deficit, noting that the 35-year-old corporation has been operating at a deficit for most of its existence. They say the PBGC has many years to recoup its losses and fulfill its obligations to pensioners. "Every time the economy bounces around, everybody acts like everything is going to collapse and that they should worry about the PBGC, and then things come back," says Dallas Salisbury, president of the Employee Benefit Research Institute in Washington. Others who pore over the PBGC annual reports predict a bailout is inevitable. "Barring some absolutely phenomenal gains in the market or what PBGC's new or future investment strategy comes up with, the PBGC will need taxpayer money at some point in time," said David John, a pensions expert at the conservative Heritage Foundation.

For now, the PBGC, which is awaiting a new boss, will remain on the Government Accountability Office's "high risk" watch list for the seventh consecutive year because of worries that the economic crisis could mean more pension plan terminations and swell the PBGC's deficit. Taking over the pension plan of General Motors Corp., which just announced it will cut 10,000 salaried jobs, would more than double the PBGC's current $11 billion deficit. But the PBGC also would inherit substantial assets from the automaker's pension fund. Companies that have underfunded pension plans, but are otherwise on solid financial footing, pose little risk for the PBGC. It's the companies in danger of going under that present the biggest threat. But declines in the market have left corporate pension plans severely underfunded -- to the tune of $409 billion, according to Mercer, a global consulting firm. The underfunding trend is likely to continue. Even though Congress passed a law in 2006 requiring companies to meet target dates to eventually fund 100 percent of their pension obligations, those restrictions were relaxed in December to help them weather the bad economic times.

The business community is lobbying to further waive the rules during the current economic slump. Because of plummeting asset values, companies this year are faced with having to contribute to their pension funds two to three times what they had expected, said Aliya Wong, director of pension policy at the U.S. Chamber of Commerce. "Because this is coming out of the bottom line, companies are making decisions not just about freezing their pension plans but whether they can even continue in business," Wong said. The PBGC successfully shaved nearly $3 billion off its deficit in the 2008 budget year, which ended Sept. 30, primarily because 13 auto parts makers reorganized and didn't dump their pension liabilities on the institution. Those gains were recorded before the market tanked. Still, Millard insists that a new investment strategy, which allows the PBGC in invest more aggressively in stocks and alternative investments, makes it less likely that it will need a multibillion-dollar congressional bailout.

"This site is coming soon". So read a notice last week on the US Treasury's financialstability.gov website For all the camera-ready shouting and calm exchanges concerning the risks exposed by the financial crisis, there is one risk that gets no attention: the risk of putting weak people in positions of leadership.I've been calling around to get a sense of the progress being made on structural reforms of the US securities markets. The answer is: very little, if any. The inside information I can whisper to you is that the inside has no information. The financial system has a peacetime officer corps in a wartime situation. The people in positions of responsibility are principally interested in preserving their careers and avoiding public embarrassment. There are rare and important exceptions, such as Paul Volcker, who has nothing to prove about his integrity, and who is past any need to advance his career.

To identify what has to be done to put securities markets, banking and regulation on a sound basis for the future, the people at the top might have to admit to the specifics of their own past mistakes. They would also need a command of detail of the workings of the financial system that they have avoided acquiring over the years, since it was much more advantageous to spend one's time scheming and toadying. This is a naturally occurring aspect of human nature, but it is usually kept in check by periodic crises, which thin the herd and force the survivors to adapt. The "great moderation", also known as periodic monetary bail-outs, in developed countries for the past couple of decades has prevented that process.

Let's consider a specific issue, the reform of the leading US ratings agencies. The shortcomings of the ratings agencies have been well known for many years on Wall Street, and at least a couple of years in Washington. The direct conflict of interest created by having the issuers of securities pay the people who are rating their creditworthiness has been clear for years. The effects of that conflict, including the insolvency of "investment-grade" issuers, contributed heavily to the present crisis. There have been hearings, comment articles, speeches and denunciations, all to this effect. So what are the federal regulators, and Congress, actually doing about ratings agency reform?

Not much. The crucial agency is the Securities and Exchange Commission, which has supervisory authority over the Nationally Recognised Statistical Rating Organisations, as the ratings agencies are called. The SEC, though, is an agency run by lawyers who tend to use legal, rather than economic, reasoning. According to a securities industry person who has had intensive contact with the SEC lately, its staff are preoccupied with damage control. "They're not thinking about ratings reform, they're thinking about keeping their jobs. The Bernie Madoff fiasco has them in shell shock." Mary Schapiro, the new chairman of the SEC, has said that the ratings agencies' conflicts should be looked into, but that suggests a rather long time horizon to revive confidence in the system.

Sean Egan, whose Egan-Jones rating agency is one NRSRO that is paid by the investors, not the issuers, is frustrated by the slow progress in the reform process. "You have to back up to why the markets are frozen, and the answer is a lack of credibility in risk assessment," Mr Egan says. Why don't the institutional investors take the lead on ratings reform if the SEC is too slow? Mr Egan says: "You have a problem with the money market funds that the institutional investors sell [which are rated for creditworthiness by the ratings agencies]. The institutions don't want to be out there in public trashing S&P and Moody's because they are afraid of retaliation," even if there is no basis for that fear. So even such a narrow, if critical, issue as ratings agency reform is in a sort of legislative-regulatory limbo.

There is a widespread assumption that the Federal Reserve is available as a universal, supreme regulator of all financial risk. However, the Fed staff are preoccupied with figuring out the details of the various "temporary" support programmes. Not many of them have operating experience in financial markets; they were employed to take the long view on monetary policy, not for the tactical execution of investment programmes. Those are very different disciplines. Congressional leaders know that. Democratic and Republican senators share a high degree of scepticism about the ability of the Fed, effectively, to redesign and then run the financial world. In the past, there were Wall Streeters of both parties with sufficient weight and creditability to identify problems and put together solutions. Not now. All we need to end the remaining illusions, is, I believe, one more big trauma. Auto companies?

In corporate Japan, losing your job can mean losing your home as well. As major companies cut their work forces in the economic downturn, many Japanese workers are finding themselves out on the street because they have to move out of company-run dormitories. Sadanori Suzuki was one of them. The 26-year-old lost his job at a car factory in December, and by mid-January he was kicked out of the dorm run by his employer. He moved from Internet cafes — which often have private rooms and double as flop houses — to "capsule" hotels, which are coffin-like individual compartments just for sleeping. But within two weeks he was nearly broke and out on the street. He found his way to a Shinto shrine in Kawagoe, a Tokyo suburb, where he planned to take temporary refuge. But the worship hall was locked. Exasperated, Suzuki set fire on the shrine, then called police from a nearby pay phone and turned himself in. When he was arrested, last week, he had only 10 yen (11 cents).

In a country where lifetime employment has long been held up as an idealized standard, Japanese are finding out fast that the unemployment safety net for part-time, temporary or contract workers has become painfully obsolete. "In Japan, people quite often become homeless as soon as they lose their jobs," said Makoto Yuasa, head of Independent Life Support Center, a grass-roots activist group. "There is no protection for people who are able to work but are out of jobs." On Monday, the government reported that the Japanese economy shrank at its fastest rate in 35 years in the fourth quarter — at an annual pace of 12.7 percent — and shows no signs of reversing course anytime soon. It is more than triple the 3.8 percent annualized contraction in the U.S. in the same quarter. According to the latest government estimates, released last month, some 125,000 part-time workers will lose their jobs by March. Labor officials cannot follow what happens to all those who lose their employment, but of the 45,800 who have been tracked, the government found 2,700 became homeless.

Private estimates go much higher — to upward of 400,000 new jobless by the end of next month — and say more than 30,000 of them will become homeless, nearly double the country's nationwide homelessness figure. By the official count, the number of homeless is 16,000 and has been slightly decreasing for several years. "This is just the beginning," said Hitoshi Ichikawa, a ministry official in charge of labor policies. "There will be many more in coming weeks and months." The wide use of temps in manufacturing was only legalized in 2004, allowing corporate giants such as Toyota Motor Corp. and Canon Inc. to rely on seasonal workers. Using temporary workers allows companies to adjust production to gyrating overseas demand through hiring agencies that often provide dormitories. Nearly one-third of the Japanese work force is made up of temporary workers, including 3.8 million bottom-tier workers who are sent countrywide to provide labor on demand.

A key to Japan's fragile economic recovery has been the explosion in temporary employment agencies, brokers who allow corporations to take on labor without having to pay benefits — and then unload workers at will. Another factor is "freeters" — a growing segment of young people who choose to move from one part-time job to the next. Independent union organizer Makoto Kawazoe said temporary workers are given low-paying, tough factory jobs, with an average basic monthly salary of about 150,000 yen ($1,650), barely enough to make ends meet. When they are laid off and evicted from employer-provided housing, they often have no savings. Three-quarters of Japan's temporary workers earn less than 2 million yen ($21,740) a year. "They have no choice but rely on their job agencies to find another job that comes with a dormitory," Kawazoe said. "Once you get trapped in the cycle, it's very difficult to get out."

The job-with-a-room package allows job agencies to supply workers who can start the job right away, without wasting time finding a place to live, Kawazoe said. "It's a scheme to attract the poor to take the low-paying, hard labor and keep them in the system." Japan's unemployment rate jumped in December to 4.4 percent, up 0.5 points from a month earlier. That means 2.7 million people are out of jobs, up 390,000 from the previous year. The number of people on government welfare has risen by more than 46,000 since last year. In Tokyo and major cities across the country, welfare rolls rose 35 percent in January alone. On the streets, the statistics are becoming a visible reality. The government-run Hello Work job agencies are packed with young jobseekers, many carrying duffel or shopping bags with their belongings. They apply for a one-time 100,000 yen ($1,090) allowance and low-rent housing, which opposition lawmakers and advocacy groups say is far too little.

In a parliamentary debate last week, Economy Minister Kaoru Yosano urged companies to do more to protect their workers. "Major companies have a social responsibility to sustain their work force," he said. "They are useless if they ignore that responsibility." But Prime Minister Taro Aso — who has promised to create 1.6 million jobs over the next three years — said the government has put in place programs such as housing loans and subsidies to companies to maintain their work forces. "We have provided support for those who have lost both jobs and homes, and we'll continue to take appropriate steps," he told a parliamentary session Monday. Even so, the situation has gotten so bad that some Tokyo neighborhood offices have set up temporary showers for those who need to clean up before resuming their job search.

Over the New Year holidays, a tent village set up by a group of labor union members in Tokyo's Hibiya Park was almost instantly filled, prompting the Labor Ministry to open a nearby public gymnasium to accommodate the overflow. Hundreds came from out of town when word got around. The government later made available vacant public housing for 4,000 people in several locations in Tokyo through a relief package of financial aid and rent. Companies say they are also working to respond. Toyota has announced it will slash its temporary workers by 1,700 through March — from 4,700 — by not extending their contracts. But it has promised to shift some to full-time positions or transfer them to subsidiaries or affiliates. "We are doing the best we can," a Toyota spokesman said on condition of anonymity, because of the sensitivity of the topic. From December, Toyota has also started allowing temporary workers to stay at company-run dormitories for up to a month without charge. Before that, a temp worker had only three days to pack up and leave.

Currencies have crumbled across Eastern Europe on mounting fears of a debt crisis as foreign creditors withdraw from the region. Hungary’s forint fell to an all-time low on Monday, and Poland’s zloty slumped to the lowest in five years on plunging industrial output. Half of all loans to the private sector in Poland are in foreign currencies so borrowers face a severe debt shock after the 40pc fall of the zloty against the euro since August. "We’re nearing the level were things could get out of hand," said Hans Redeker, currency chief strategist at BNP Paribas. The mushrooming crisis has already started to spill over into Germany's debt markets, lifting credit default swaps on German five-year bonds to a record 70 basis points.

The gap between French and German CDS spreads has narrowed abruptly for the first time since the credit crisis began. "Investors are beginning to ask whether Germany is going to have to pay for the rescue of Eastern and Central Europe," he said. A report by Moody’s released on Tuesday said the region’s banks were coming under severe stress as the property bust combines with a rising debt burden. "Local currency depreciation is a major risk to East Europe banks," it said. There are contagion worries for Western banks that have lent $1.74 trillion (£1.22bn) to the ex-Soviet bloc -- split between $1 trillion in foreign loans and $700bn in local currency debt through subsidiaries. Austria’s banks are the most exposed with the share of risk-weighted assets tied to the region reaching 54pc for Raffeisen and 38pc for Erste Bank. The exposure of Germany’s Bayern Bank is 48pc, Italy’s UniCredit is 45pc, and Swedbank is 29pc.

The region needs to roll over $400bn in foreign debts this year, equivalent to a third of total GDP, raising concerns that it may need a massive rescue programme from the International Monetary Fund and the European institutions. Dominique Strauss-Kahn, the IMF’s chief, said he expected a "second wave of countries to come knocking" after earlier bail-outs of Latvia, Hungary, Ukraine, and Belarus -- as well as Iceland and Pakistan. The fund is scrambing to raise more money to cover the possible eruption of major crises in several countries simultaneously. The Japanese have already agreed to supply an extra $200bn. The European Bank for Reconstruction and Development says East Europe may need as much as €400bn (£358bn) in help this year to refinance loans and inject fresh capital into the banking system. Austrian-led efforts to create to a pan-EU fighting fund to tackle the crisis early have garnered little support so far.

Moody’s Investors Service said some of Europe’s largest banks may be downgraded because of loans to eastern Europe, sending UniCredit SpA to its lowest in 12 years. Moody’s sees "continuous downward rating pressure" in the region as a result of worsening asset quality and western banks’ reliance on short-term funding, the ratings company said in a report published today. UniCredit earned almost half its pretax profit from eastern Europe, Raiffeisen International Bank-Holding AG almost 80 percent in 2007 and Erste Group Bank AG of Austria more than 60 percent, Moody’s said.

The MSCI East Europe Financials Index dropped 9.9 percent to the lowest in almost six years after the Moody’s statement today. The International Monetary Fund has offered aid worth about $52 billion to Latvia, Hungary, Serbia and Ukraine. It may extend bailouts to Bulgaria, Romania, Lithuania and Estonia, according to Capital Economics research. "The most risky parts of the western European banks’ businesses are in eastern Europe and when you decide to cut risks, you cut back on the most risky assets first," Lars Christensen, an analyst at Danske Bank A/S in Copenhagen, said by telephone today. "This could add further risk in the region as the economies there may face large current account deficits if funding from western European banks is withdrawn."

UniCredit dropped as much as 8.3 percent in Milan trading and was 6.5 percent lower at 1.13 euros as of 12:36 p.m. Raiffeisen International declined 8.9 percent and Erste 8.4 percent in Vienna trading. Moody’s also noted that Societe Generale SA of France, which was down 10 percent in Paris, and KBC Groep NV of Belgium, trading 11 percent lower in Brussels, were among the five biggest western banks in the region. "The downturn in eastern Europe will be more severe as a consequence of many countries’ dependence" on capital flows from west Europe banks, analysts led by Reynold Leegerstee wrote in the report.

West European banks might become selective in supporting their subsidiaries and "banks in countries that are associated with higher systemic risks might face reduced support," Moody’s said. Western governments may also establish rules to ensure banks getting state support do not aid foreign units, it added. Banks from Austria, Italy, France, Belgium, Germany and Sweden account for 84 percent of bank loans in central and eastern Europe. Austria’s banking system is "most exposed" to the region, according to Moody’s. When ratings are lowered, lenders also face higher funding costs, which would further erode the capital they may need to weather losses in eastern Europe.

In December, Raiffeisen International and Erste together with UniCredit, Intesa SanPaolo SpA, Societe Generale and KBC, asked the European Union to organize financial aid for countries on its eastern borders. Erste, which said last week that full-year profit probably slumped about 26 percent, is in talks with the Austrian government to get 2.7 billion euros ($3.4 billion) in state aid. Raiffeisen Zentralbank Oesterreich AG, the parent of Raiffeisen International, has asked for 1.75 billion euros. The bank yesterday cut more than 2,100 jobs in Ukraine and Hungary. Erste owns Ceska Sporitelna AS in the Czech Republic and Romania’s Banca Comerciala Romana SA. Raiffeisen International owns ZAO Raiffeisenbank in Russia and VAT Raiffeisen Bank Aval in Ukraine.

Currencies in central and east Europe have tumbled against the dollar and euro in the past year. Poland’s Zloty has dropped 15 percent against the euro and 23 percent against the dollar. The Hungarian Forint has declined about 13.7 percent versus the euro, while the Czech Koruna has slumped 9.2 percent and the Romanian Leu 6.7 percent. Swedish banks with holdings in the region also fell today. Swedbank AB dropped 3.6 percent, its lowest level in more than a week, while SEB AB slumped 7.8 percent. Swedish banks began expanding in the Baltic states of Latvia, Lithuania and Estonia in 1998. Swedbank, the largest lender in the region, bought a stake in Estonia’s Hansabank in 1998 and took full control in 2005.

SEB AB took full control of Estonia’s Eesti Uhispank, Latvia’s Latvijas Unibanka and Lithuania’s Vilniaus Bankas in 2000.As the Baltic states enter their worst recession since independence from the Soviet Union in 1991, Swedish banks have been forced to raise cash from shareholders to boost capital and establish special units to deal with delinquent loans. Impairments and provisions for anticipated future loan losses at Swedbank soared more than sixfold to 1.63 billion kronor ($190 million) in the fourth quarter from 238 million kronor a year earlier, mainly because of the Baltic states, it said earlier this month.

Several of Europe's top banks skidded on Tuesday as investors fretted that exposure to their once-fast growing Eastern neighbours will prove to be a thorn in the side of many lenders. The sell-off was sparked by a report from Moody's Investors Services, which said it's concerned about Western European banks that are supporting subsidiaries in Eastern Europe against a rapidly deteriorating global macroeconomic backdrop. "Deteriorating financial strength of East European subsidiaries has a negative spillover effect on their West European parents. Maintaining a robust risk-return profile during a downturn in the untested and still more volatile East European markets will prove a challenge going forward," the agency said.

The rating agency said that banks headquartered in Austria, Italy, France, Belgium, Germany and Sweden account for 84% of the total Western European bank claims on Eastern Europe. Individual lenders exposed include Raiffeisen and Erste Bank in Austria, Societe Generale in France, Unicredit in Italy and KBC in Belgium, the agency said. Raiffeisen shares fell 9.1%, Erste Bank shares dropped 12.2%, Societe Generale shares fell 8.2%, Unicredit shares lost 5.8% and KBC shares fell 11.2%. Eastern Europe is widely seen by analysts as the emerging markets region that's most vulnerable to financial and economic risk.

A number of countries in the region, including Hungary, Ukraine, Latvia, and Serbia, have been bailed out by the International Monetary Fund, but the situation even there remains fragile. "Western European banks have been very exposed to Eastern Europe for some time. That was fine when Europe was doing well but now things have turned nasty they are risking rising bad debts," said Nigel Rendell, senior strategist at RBC Emerging Markets. "Even if a proportion of the loans in Europe turn bad, it could have very serious repercussions for the banking sector, Europe in general, and the currency," he said.

Assets in Eastern Europe came under heavy selling pressure on Tuesday. The euro fell 1.3% to $1.2628 against the dollar on Tuesday and the Hungarian forint briefly touched a record low. The Polish zloty and the Czech koruna fell more than 1% against the euro. Equity markets in the region also posted steep losses on Tuesday. Russia's RTS index fell 7%, Poland's WIG 20 index dropped 4% and the Czech Republic's the PX stock index tumbled 6.8%. In Hungary, the BUX stock index fell 2.5%, while the CETOP20 index, or Central European Blue Chip Index, fell 7%. The latter index reflects the performance of 20 companies with the biggest market value and turnover in the Central European region. The Budapest Stock Exchange temporarily suspended trading in the shares of OTP Bank after they tumbled 10%.

In Bulgaria, the Sofix index dropped 5.8%, while Romania's BET stock index tumbled 8.2%. In addition, credit default swaps have soared dramatically across Eastern Europe in recent days, indicating a high risk of default. "To us, this looks like a market meltdown on the same scale as occurred during the Asian crisis of 1997," said Lars Christensen, chief analyst at Denmark's Danske Bank. "Doubtless, the markets have decided that the CEE [Central and Eastern Europe] region is the subprime area of Europe and now everybody is running for the door." Christensen added.

A slew of economic data out recently has highlighted the depth of the crisis facing Eastern Europe, with Estonia last week reporting a 9.4% plunge in GDP in the fourth quarter of 2008. Data out this week included a 2.9% year-on-year drop in Czech retail sales and a 34.1% year-on-year drop in Ukrainian industrial production. "The countries are in a difficult situation. Therefore a strong increase of loan losses seems inevitable. The main risk is that a lot of borrowers were tempted to lend in currencies such as the Swiss franc and the euro because interest rates were much lower and now repaying these loans is very difficult," noted Christoph Bossman, banking analyst at WestLB. The report from Moody's was also published in the midst of the European bank earnings season, which is generally showing lenders already struggling with write-downs on other investments.

Societe Generale reports fourth-quarter earnings on Wednesday and analysts at Deutsche Bank said that they will be focusing on bad debt charges and the outlook. "While a cash dividend would be good news for investors, the option of a scrip dividend is likely under consideration as the tier 1 ratio is suffering from depleted earnings and the impact of credit rating migration," the analysts said. "The fourth quarter should also show the first signs of sharp credit-quality deterioration, especially in Eastern Europe," they added. Societe Generale bought the Czech Republic's Komercni Banka in 2001. It's also a major shareholder in Russia's Rosbank. "I think that they will try and touch on this topic. I think that the concerns will not go away and risk provisioning is a topic the banks have to deal with in the coming quarters," noted Bossman at WestLB. Around 11% of Societe Generale's loan book is in CEE countries, he noted.

German Finance Minister Peer Steinbrueck said euro-region countries may be forced to bail out other members of the 16-nation bloc that face problems refinancing their debt. "Some countries are slowly getting into difficulties with their payments," Steinbrueck said late yesterday in a speech in Dusseldorf. "The euro-region treaties don’t foresee any help for insolvent countries, but in reality the other states would have to rescue those running into difficulty." While declining to identify countries facing problems, the German finance chief said Ireland, which has a widening budget deficit, is in a "very difficult situation." Ireland’s debt- rating outlook was cut by Moody’s Investors Service Jan. 30.

Steinbrueck is going further than his European Union counterparts in saying euro states can’t be allowed to fail. The EU governing treaty says member states aren’t liable for others members’ obligations. Spending to combat the worst downturn since World War II has forced governments to run up deficits that violate EU rules. The European Commission predicts budget shortfalls this year of 11 percent of gross domestic product in Ireland, 3.7 percent in Greece, 6.2 percent in Spain and 3.8 percent in Italy, compared with 2.9 percent in Germany. The EU ceiling is 3 percent.

The difference in yield, or spread, between 10-year Irish and German bonds widened nine basis points to 257 basis points today. It widened by almost six times since the middle of last year as investors demanded higher premiums to hold Irish debt. Governments including Germany’s may call in help from international organizations first before committing funds and pushing their own budgets deeper into the red to help others. The German government, presiding over Europe’s biggest economy, is "very unlikely" to provide help to troubled euro- region members by selling bonds jointly, Juergen Michels, an economist at Citigroup Inc. in London, said in an interview, adding that it would be a "very expensive solution."

"The most likely option is that the European Investment Bank or some other multinational organization will start supporting these countries by buying government bonds or by providing direct support," Michels said. "That would help narrow spreads and reduce refinancing costs." Investors should keep buying bonds of European governments that have "more flexibility in funding requirements in the short term," Barclays Plc analysts said today. It’s better to be "adding positions here rather than in the periphery, where any renewed funding concerns may weigh more heavily," Huw Worthington, a fixed-income strategist at Barclays Capitalin London, wrote in a research note.

Widening yield spreads are "worrying developments," Luxembourg Finance Minister Jean-Claude Juncker, who represents the countries sharing the euro at international meetings, said at a Group of Seven gathering in Rome on Feb. 14, according to an unpublished prepared "speaking note." Michels said the EU can help governments that are finding it hard to sell their bonds without violating the bloc’s "no bail-out" clause. Any insolvency of a euro region country would be "fraught with significant costs" for the EU as a whole.

Air Canada, the country's biggest airline, could be forced to file for bankruptcy protection if it does not secure additional financing and succeed in renegotiating covenants in credit card agreements, UBS analyst Fadi Chamoun said. 'Notwithstanding lower fuel costs, we believe that cash from operations will be insufficient to meet rising pension funding obligations and over C$1 billion ($800 million) of debt repayment over the next two years,' Chamoun said in a note dated Feb. 13.

Covenants in credit card agreements could tighten further in the second quarter and result in the airline being required to maintain higher cash deposits, said Chamoun, who downgraded Air Canada to 'sell' from 'neutral'. He also cut his target price for its shares to C$1 from C$1.50. 'In the absence of additional financing (sale of assets) and renegotiation of covenants in credit card agreements, Air Canada could be forced to file for bankruptcy in our opinion,' he wrote. Air Canada spokeswoman Angela Mah declined to comment on the UBS report.

Air Canada's class B shares were down more than 12 percent early Tuesday afternoon, dropping 18 Canadian cents to C$1.27. The shares have fallen 87 percent over the past 12 months. The company said on Friday it has shored up its balance sheet with C$641 million in new financing, but warned that the recession may put more pressure on its revenue in 2009. Air Canada said it has up to C$1 billion of assets it could use to increase its liquidity if needed.

The Dutch economy is expected to shrink by 3.5 percent this year, according to forecasts issued by the government's economic policy bureau CPB on Tuesday. The extent of the predicted economic slowdown will come as a blow to the government, which heard the CPB predict a shrinkage for 2009 of 0.75 percent just two months ago. On the work horizon, prospects are pessimistic. The CPB forecasts that the unemployment rate will rise to 5.5 percent this year and will affect no less than 8.75 percent of the workforce by 2010. Despite all the economic gloom and doom, consumer spending power in the average household is not expected to decline. This year, it will even rise by 2.25 and remain stable in 2010. The government, which will be convening for extra sessions on the economy in the coming period, will use Tuesday's figures as guidelines for developing a series of measures to combat the slowdown.

Lloyds could be forced to write off a further swath of loans made by HBOS to hundreds of companies, after figures showed many of the loans are worth only a fraction of their original value. The troubled bank has made huge loans to commercial property developers, hotel chains and leisure companies, and is expected to wipe hundreds of millions of pounds off the value of its loan book, in addition to the £10bn Lloyds struck off its balance sheet last week, as the economy worsens and many of the businesses that borrowed money go bust.

Analysts blamed the bank for expanding its lending at the height of the credit boom, leaving it over-exposed to commercial businesses that could go under in a prolonged downturn. Between the end of 2005 and December 2007, its corporate lending jumped from £79bn to £109bn, backing deals including the £350m acquisition of the cinema chain Vue Entertainment in 2006 and a management buyout of the shirt retailer TM Lewin & Sons. Further deterioration in the bank's loans could force Lloyds' management to call for further funds from the government. But Lloyds' chairman, Sir Victor Blank, already under intense pressure to justify the purchase of HBOS, would be forced to explain why the bank's finances have weakened further before any capital injection could be agreed.

Former HBOS chief executive Sir James Crosby, who faces allegations that he ignored warnings from the bank's head of risk management, Paul Moore, of lax credit controls, has denied that he allowed money to be lent recklessly. But he has come under pressure from MPs for presiding over a lending boom that saw it become involved in almost every major borrowing exercise of the past 10 years. He has also come under fire for allowing the bank's head of corporate lending, Peter Cummings, to create "a bank within a bank" as part of an expansion of lending to businesses. Most of the loans offered by HBOS were borrowed on the international money markets from other banks. Cummings, who quit last month, is accused of forging ahead with a series of deals in 2007, despite the credit crunch, and increasing the bank's exposure to the wholesale debts markets even as they were about to freeze up.

Figures from the debt markets show that Smurfit Kappa, a packaging manufacturer supported by HBOS loans, has its debt trading at 69% of its original value. Another firm, Towergate, an insurance group backed by HBOS and Lloyds, has breached covenants and is struggling to repay its debts. After enduring a volatile trading day, shares in Lloyds Banking Group closed 8% lower at 56.4p. Analysts were divided on the implications of the £10bn of HBOS losses on the capital cushion of the bank and the longer-term requirements for extra capital. Ian Gordon, an analyst at Exane BNP Paribas, said: "While the immediate focus has been on the shocking deterioration in reported earnings, investors should draw some relief from the fact that the anticipated impact on capital is more muted."

Analysts at Citigroup, though, warned that the combined bank could need to raise more than £11bn of fresh capital and take the taxpayer stake to more than 75%. Analysts believe that the loan guarantee scheme being discussed between the banks and the government will help to bolster confidence in the embattled sector. Royal Bank of Scotland has admitted it is the "guinea pig" for the scheme. City sources believe that the pricing of the insurance - which is intended to soften the blow of loans which have turned toxic in the recession - will be crucial. Moody's rating agency also downgraded Lloyds' credit rating, expressing concern about the "high level of troubled and higher-risk exposures within HBOS". In turn, the cost of buying debt protection on Lloyds TSB and Bank of Scotland, part of HBOS, rose slightly. The government, though, played down the need to nationalise the bank.

HBOS became known as one of the biggest players in the market for corporate loans and many of its executives were keen to expand overseas. Divisions such as Real Estate in Continental Europe lent more than €9bn between 2003 and December 2007. In Germany, the Real Estate team, set up in 2004, had a lending book of more than €3bn in April 2008. HBOS financed buyouts and businesses which have since either fallen into administration, such as shoe retailer Stead & Simpson, or are in the hands of their lenders. Homebuilders Crest Nicholson and McCarthy & Stone are both in debt restructuring talks with their banks, including HBOS.

Crest Nicholson has more than £1bn of debt, and was purchased in a 50-50 venture by HBOS and the Scottish entrepreneur Tom Hunter near the peak of the real estate bubble. The bank also bought McCarthy & Stone in a £1.1bn deal, together with Tom Hunter and the property entrepreneurs the Reuben Brothers. HBOS is also a lender to the beleaguered sports retailer JJB sports, which has agreed an extension of its debt payments as it tries to sell its fitness club chain. Other JJB creditors include Barclays and the Icelandic bank Kaupthing. Other deals are the £925m acquisition of David Lloyd Leisure, along with London & Regional Properties, from Whitbread Plc in June 2007, at the peak of the credit boom.

Every time Gordon Brown wants to find a banker to blame for the recession, he faces a rather embarrassing problem. Their names normally start in ‘Sir’ or ‘Lord’. Titles HE quietly arranged for them during the boom years. And that reminds us why Britain is risking bankruptcy—the unholy alliance between politicians and bankers. Staggeringly, taxpayers may soon end up spending billions bailing out yet ANOTHER bank, Lloyds. Cash that can only be found by saddling future generations with even more debt. Once, we paid taxes to fund schools and hospitals. Now our tax pounds go to bailing out banks and paying their bonuses.

It’s like there has been some coup d’etat—instead of taxpayers owning banks, the banks now own the taxpayers. I’d love to blame the bankers, to say their greed has driven us to bankruptcy. But it’s far more complicated than that. Right at the very start, New Labour struck an unspoken deal with the men who would be their pinstriped paymasters. They’d be granted a free reign to take all sorts of risks. London would become the biggest casino on earth. As Peter Mandelson famously said, Labour was "seriously relaxed about people getting filthy rich".

But with a catch. The government wanted its cut. The bankers would pay shedloads of tax, and they’d keep the party going as long as they could. Apart from bordello owners and Ferrari dealers, no one looked forward to City bonus day more than Brown’s ministers. The Treasury took a 40 per cent stake in every windfall. At one stage, a quarter of all UK tax was from financiers. Amazingly, the bankers even wrote government policy. Sir Derek Wanless on the NHS. Lord Sandy Leitch on skills. So, slowly, Britain became a bankocracy. What we called "prosperity" was, in fact, a bubble waiting to burst.

I have no idea just how Gordo ever thought he could shovel blame on the bankers, with whom he was in cahoots for so long. All trails lead back to his door. Exhibit A is Sir James Crosby, the former HBOS chief last week accused of sacking a whistleblower. Just as everyone was getting read to lynch him, it turns out he was Brown’s appointment to the Financial Services Authority watchdog. This is why he was ousted from the FSA faster than a Chelsea manager. He embodied the link between ministers and the banks. There are plenty other links too. Take the disastrous shotgun marriage between Lloyds TSB and HBOS, which may sink them both.

Who was the matchmaker? Our very own Prime Minister, over a drink with his mate Sir Victor Blank, chairman of Lloyds. In his rush to be seen to be acting—to be "saving the world" as he unforgettably put it—Gordo landed us in a mindblowing new mess. Only now are we beginning to understand the cost of this. Remember the £37 billion to save the banks? It’s gone. All it took was a write-down here, multi-billion loss there—eye-watering sums, gone at the stroke of a pen. Never in British history has so much taxpayers’ money been destroyed so quickly. And the bonfire of your cash is still burning. It means this generation—and the next—will be paying higher taxes and getting worse services. Even our PM, with his famous inability to say sorry, must now regret cutting his Faustian pinstriped pact all those years ago. Because Britain now looks like one massive, collapsed hedge fund, a bust bank, with a struggling government attached. Worst of all, no one knows what more is in store. This mother of all busts is still just starting.

UK inflation has fallen to its lowest level in almost 50 years as the recession hits housing costs and drives oil prices lower. Retail price inflation - a measure of the cost of living on which most wage settlements in Britain are based - fell 1.3pc in January compared with December. That drove the annual increase to just 0.1pc - the lowest since March 1960. Inflation has been falling since it peaked in September as Britain's worst recession in at least two decades forces retailers to cut prices, fuels unemployment, drives down house prices and squeezes demand for commodities, including oil. Crude oil has tumbled to about $40 a barrel from its peak of $147 in July and UK house prices fell 16pc last year, according to Halifax.

Some economists had expected that January's figures would show deflation, an outright decline in prices on an annual basis, and most expect that to happen soon. Having spent the first half of last year fighting inflation, the Bank of England is now gearing up to prevent deflation becoming entrenched in the economy. "Outright RPI deflation may be slightly more problematic, " said Peter Dixon, an economist at Commerzbank. "In the short term, this will help to boost real wage growth but deflation will eventually curb demand growth if it persists." A bout of deflation would be damaging for the economy as consumers put off spending in the hope that prices will fall further. Meanwhile, the Consumer Price Index (CPI) - the Government’s preferred measure of inflation and that used by the Bank of England when setting interest rates - fell by 0.7pc in January, leaving the annual rate at 3pc. Economists had forecast that the annual rate of CPI would fall to 2.7pc.

With the recession ripping pricing power away from companies, some economists expect CPI to record an outright fall at somepoint this year. "Consumer price inflation is likely to turn negative for a time in the second half of 2009," said Howard Archer, an economist at Global Insight. Sterling recovered its losses against the dollar on the news, and was trading at almost $1.43 by mid morning. The Bank of England's Deputy Governor, Charlie Bean, warned yesterday that the recession was likely to be more severe than the Bank's forecast for a 3pc fall in gross domestic product in its Inflation Report last week. In the Report, the Bank of England forecasts implied CPI will trough at about 0.75pc in the fourth quarter of 2009, recovering to 1.25pc in the first quarter of 2010 after the VAT cut is reversed, before falling back to below 1pc later next year.

House prices in the UK dropped by 2.3 per cent during December, pushing the annual rate at which values are falling to a new record, figures show. Homes lost 10.2 per cent of their value during the 12 months to the end of December, the first time the Department for Communities and Local Government has recorded a double-digit drop since it first started collecting the data in 2003. The steep fall reported during December contrasts with more recent figures on the property market, which suggest buyers may be beginning to return. Britain's biggest mortgage lender, Halifax, said house prices rose by 1.9 per cent during January, although economists cautioned against reading too much into one month's figures.

The Royal Institution of Chartered Surveyors (RICS) and the National Association of Estate Agents have both also reported increased interest from potential buyers following interest rate cuts and house price falls. The DCLG figures tend to lag behind other data as they are based on completion prices, while other indexes report on house prices earlier on in the buying process. They are also a month behind other indexes, reporting figures for December as opposed to January. Howard Archer, chief UK and European economist at IHS Global Insight, said: "While latest survey evidence indicates that buyer inquiries are now picking up significantly as people are attracted by lower house prices and the Bank of England slashing interest rates, we are sceptical that this will lead to a marked up in actual sales any time soon. We certainly expect house prices to continue to fall for some considerable time to come."

The Government figures showed a doubling in the quarterly rate at which prices are falling, with homes losing 6.4 per cent of their value during the three months to the end of December, compared with a drop of 3 per cent during the third quarter of the year. December's price fall was driven by a steep drop in the average price of a detached home, which fell by 4.1 per cent during the month, while flats lost 2.4 per cent of their value and the price of bungalows and semi-detached homes eased by 2.3 per cent and 2 per cent respectively. Terraced houses fared slightly better, with their value dropping by a more moderate 0.8 per cent. Annual house price falls are now in double digits in all but four regions of the country, with the rate at which prices are dropping accelerating in all areas. Scotland has seen the smallest price drops, with the average cost of a home falling by 6 per cent during the year to the end of December, followed by a drop of 8.9 per cent in the North East.

The biggest drops have been reported in Northern Ireland, where homes have lost 17.9 per cent of their value during the past year, while in the East Midlands and South East prices have fallen by 11.5 per cent and 11.3 per cent respectively. The average property in the UK now costs £195,317, ranging from £136,057 in the North East to £304,421 in London. First-time buyers are paying an average of 13 per cent less for a home than they were in December 2007, while the price paid by homeowners has dropped by 9.2 per cent. RICS released research today suggesting that homeowners are returning to the property market in the hope of picking up a bargain following recent price falls. Three-quarters of surveyors said homeowners were driving a jump in inquiries, reported during the past three months, while 38 per cent have seen a pick-up in interest from investors. But first-time buyers are continuing to be frozen out of the market as lenders demand high deposits, with only 23 per cent of surveyors reporting a rise in interest from people taking their first step on to the property ladder. Seven out of 10 surveyors think lower house prices are responsible for the growth in interest, while 48 per cent believe buyers think the bottom of the market is now in sight. The group said that while the Halifax and Nationwide house price indexes showed a fall of around 20 per cent since house prices peaked in 2007, many surveyors think the drop in transaction prices is closer to 30 per cent.

Chinese companies may be using record bank lending to invest in stocks, fueling a rally that’s made the benchmark Shanghai Composite Index the world’s best performer this year, according to Shenyin & Wanguo Securities Co. As much as 660 billion yuan ($97 billion) may have been converted by companies into term deposits or used to buy equities, Li Huiyong, Shanghai-based analyst at Shenyin Wanguo, said in a phone interview today, citing money supply figures. China’s banks lent a record 1.62 trillion yuan in January as part of a government drive to stimulate the world’s third- largest economy, while M2, the broadest measure of money supply, climbed 18.8 percent from a year earlier. The Shanghai Composite has surged 29 percent since the start of 2009, compared with a 10 percent decline in the MSCI World Index.

"Part of the liquidity flowing into the stock market could be from companies using borrowed funds to invest in the stock market instead of working requirements," said Li. He arrived at the 660 billion yuan figure by subtracting M1, which includes cash and demand deposits, from M2. The brokerage was voted the best in the country for research by the national pension fund, China’s largest investor. New loans jumped to twice the record set a year earlier. The biggest proportion of new lending, 39 percent, was through discounted bills, which supply working capital. Medium and long- term corporate loans accounted for 32 percent.

Companies are reluctant to increase production amid a slowdown in demand and some may have diverted funds meant for expansion into the stock market to chase higher returns, said Li. China’s central bank is asking lenders to identify the recipients of last month’s loans to ensure the funding contributes to economic growth, a person with knowledge of the matter said Feb. 13, speaking on condition of anonymity. Loan growth may continue to surge this month, the Shanghai Securities News reported today, without citing a source. The government is putting pressure on banks to support its 4 trillion yuan stimulus package, while seeking to avoid a pile- up of bad loans. Default risk represents the biggest threat to Chinese lenders this year, Fitch Ratings has said.

"It’s hard for banks to tell whether the funds are flowing into the real economy or into the stock market," said Michelle Qi, a Shanghai-based portfolio manager at Bank of Communications Schroder Fund Management, which oversees about $790 million. "In the short term, there’s a risk that this inflow of funds could push the market too high," she said. The rally has driven stock valuations 41 percent higher since November, when the Shanghai Composite Index traded at 13.3 times earnings, the lowest since at least November 1997, according to Bloomberg data. The gauge was valued at 48.7 times earnings at its peak in October 2007. Equity transactions rose last week to the highest in at least three years. The Shanghai and Shenzhen exchanges handled a combined 32 billion shares Feb. 13, the most since Bloomberg started compiling the data in January 2006. An average of 17.3 billion shares have changed hands daily this year, compared with 9.8 billion shares in 2008.

China’s banking regulator is reviewing commercial lenders’ financing of discounted bills after January’s surge prompted concern about excessive risks, the China Business News reported yesterday, citing unidentified people. Fortune SGAM Fund Management Co.’s Gabriel Gondard said while there may be examples of companies diverting working funds into the stock market, they are likely to be in the minority. "Corporates are in need of working capital right now," said Gondard, who helps oversee about $7.2 billion. "There may be exceptions, but it’s not big enough an impact to explain the rally." China’s domestic stock market capitalization has increased by $743.1 billion since November, when the government announced its 4 trillion yuan stimulus plan. The rally has drawn more Chinese investors. About 224,000 accounts were opened to trade equities on the Shanghai and Shenzhen exchanges last week, the fastest pace in almost two months. That’s still about a quarter of the record 1.07 million set up in the week to Sept. 7, 2007.

The gains in the country’s yuan-denominated shares, restricted to its citizens and approved overseas institutions, contrasts with a decline in shares of Chinese companies listed in Hong Kong, where there are no restrictions on overseas investors. The Hang Seng China Enterprise Index of Chinese companies has lost 7.7 percent this year. China’s government bonds may rally with the end of the "superficial exuberance" that drove the surge in bank lending over the last two months, Qu Qing, Shenyin Wanguo’s head of bond research said in an interview today. Some 64 percent of the new loans were made on a short-term basis, rather than for medium- and long-term investment projects, and these are likely to limit a recovery in the economy, Qu said. Most of the discounted-bill financing was "behavior by companies" to help meet their funding needs, People’s Bank of China Vice Governor Yi Gang said Feb. 14 during a conference in Beijing. "We should respect the market," he said.

Chinese exporters are defying their government and unilaterally offering their customers lower-than-official exchange rates on their products to keep their businesses churning out goods. In a move which could exacerbate tensions at a particularly sensitive time for world trade, exporters in the heart of factoryland, who believe the strength of the yuan is causing the world to turn its back on cheap Chinese goods, are taking matters into their own hands. "Last year, our export business was difficult," said Chen Ji, the owner of New Urban Buttons. "We suffered a 30pc to 50pc fall. The exchange rate is restricting us, even though the difference in our prices has not been great. So we are offering our customers a lower exchange rate to the dollar, we offer 6.85 yuan to the dollar, or more, rather than the official rate of 6.75."

The yuan has appreciated by nearly 20pc against the dollar since the currency peg was loosened in 2005. Against the pound, the yuan has risen by nearly 30pc in the last six months, causing China's exports to the UK to plunge dramatically. "I supply the US, the UK, Australia, France and Germany, but only the UK has cancelled its orders," said Wu Qianjing, a manufacturer of pet toys and collars. Mr Wu said he is still using last January's exchange rate to offset the effects of the financial crisis. Chinese traders have been able to offer discounted exchange rates because their costs have fallen since last year, after the commodity bubble burst. "The cost of our raw materials has fallen sharply since the end of 2007," said Sun Jinhui, a manager at Baoerma, a washing machine and electric heater manufacturer which has several contracts with Korea.

Since September, the South Korean won has dropped more than 40pc in value against the yuan. "We have been able to give our Korean customers lower prices in order to offset the falling value of the won," said Mr Sun. However, the behaviour of Chinese exporters is likely to be frowned on by Western countries, who believe that the flow of cheap Chinese goods is causing job losses in their own manufacturing industries. China's trade surplus was a near-record £29bn in January, and Beijing has been accused of pouring an over-supply of goods onto the world market and looking after its own interests, rather than playing a constructive role in rebalancing the system. Mark Williams, an economist at Capital Economics, noted that even though world demand for new goods is falling, "Chinese exporters, particularly of low-end manufactured goods, are still picking up global market share".

Since the financial crisis struck, China has upped tax rebates for exporters three times, and some industries can now claim back 15pc tax on their products if they are shipped overseas. The news that Chinese exporters are also offering discounted exchange rates could fan protectionist sentiment further. The United States and Europe believe the yuan should be stronger, rather than weaker, and China has been heavily criticised for not allowing it to appreciate further. The new US Treasury Secretary, Timothy Geithner, has already accused China of being a "currency manipulator", a heavily-loaded term in the US which implies the impending imposition of punitive trade sanctions. Tight wire act: a steel market in Liaoning province. Chinese exporters are offering discounts on exchange rates

Russia agreed to supply China with oil for 20 years in return for a $25 billion credit, as the world’s largest energy producer seeks to expand its presence on East Asian markets. Russia signed the accord in Beijing today to deliver 15 million metric tons a year (301,000 barrels a day) for the next two decades, as well as build a branch from a new Siberian pipeline to the Chinese border, Deputy Prime Minister Igor Sechin said on Russian state broadcaster Vesti-24. State oil producer OAO Rosneft and pipeline operator OAO Transneft will receive $25 billion in loans from the China Development Bank, Vesti-24 reported. Transneft and China National Petroleum Corp. signed a separate deal on the construction of a spur from the East Siberia-Pacific Ocean pipeline, Vesti-24 said.

Russia, which shares a 4,300-kilometer (2,700-mile) border with China, is seeking to increase its influence in East Asia by building oil and gas pipelines, starting deliveries of liquefied natural gas and hosting the Asia-Pacific Economic Cooperation summit in 2012. Currently Russia delivers oil to China via rail and a pipeline via neighboring Kazakhstan. Rosneft, whose chairman is Sechin, plans to supply the new Pacific Ocean pipeline from its Vankor field in east Siberia. Transneft expects to complete the pipeline’s first link, between Taishet in Siberia to Skovorodino on China’s northeastern border, by the end of this year.

Rosneft will get $15 billion of the credit, while Transneft will receive $10 billion, Russian state news agency RIA Novosti reported from Beijing, citing an unidentified participant in the talks. China agreed to reduce the annual interest rate by one percentage point to 6 percent, RIA reported. CNPC bought $500 million worth of shares during Rosneft’s initial public offering in July 2006. Earlier, the Chinese company extended a $6 billion loan-for-oil deal to Rosneft in December 2004, at a time when OAO Yukos Oil Co. was being dismembered under back-tax claims. Rosneft denied that loan was used to buy OAO Yuganskneftegaz, Yukos’s main production unit.

Growth in US natural gas production is expected to continue rising in the first quarter of 2009 before beginning what could be a dramatic decline, as producers complete projects started under last year's capital budgets and more favourable market conditions. "In the same way you don't start production overnight, you don't stop production overnight,'' said John Richels, president of Devon Energy, the country's biggest independent oil and gas company, which has two-thirds of its portfolio in natural gas. The natural gas rig count is down to 1,150 from a peak of just over 1,600, but the decline has been in the traditional vertical rigs – not the horizontal and directional drilling, which are used for targeting highly productive shale and tight gas supplies, according to Jen Snyder, principal of Wood Mackenzie North American Gas Research.

So the big production declines have yet to come. Mr Richels expects falls in US production – from the world's fastest growth rate in 2007 and 2008, at 4.3 per cent and 6 per cent, respectively – to take shape in the final two quarters of 2009 and into 2010. In 2006, the increase in US natural gas production was 2.3 per cent. The sharp drop in natural gas prices from a high last year of $13.50 per million British thermal units in July to below $5 has stopped many new projects. But those companies with the finances to continue investing in the sector are focusing resources on longer-term development projects and to delineate new discoveries further so they can be closer to production when the cycle turns. "These are the times, if you're a strong company, you can do very well,'' Mr Richels said.

Devon has more than $3bn in available credit. The collapse of natural gas prices is presenting the world's largest oil and gas companies, which are cash-rich after the run-up in both oil and natural gas prices to record levels last year, with an opportunity to fill the gap in their portfolios of limited positions in US natural gas. The majors had left natural gas in the US to small exploration and production companies, never anticipating that new technology, at increasingly economic prices, would make viable fields that were off-limits only a few years ago. Phil Dodge, Stanford Financial Group's lead oil and gas analyst, considers US natural gas to be a "gap'' in the majors' portfolios.

Global assets of hedge funds may drop to $1.2 trillion (840 billion pounds) by the end of the first quarter, down 35 percent from 2007 as the number of managers decline and funds rely less on strategies that use leverage, a UBS executive said on Tuesday. "We are going to see a reduction in hedge fund assets, we are going to see decline in the number of hedge funds, we are going to see some strategies that will not work in this environment," Timothy Bell, global head of hedge funds advisory at UBS Wealth Management, told reporters in Singapore.

Hedge funds had assets worth $1.9 trillion at the end of 2007, which peaked at $1.93 trillion in the middle of 2008, according to data from Chicago-based Hedge Fund Research. These assets dropped to $1.4 trillion at the end of 2008. Investors pulled $155 billion out of hedge funds last year, punishing the once hot asset class for delivering its worst-ever returns of nearly 21 percent, data shows. Bell said investors could benefit from contraction in the industry because there would be less capital and better managers chasing opportunities that could drive absolute return, as well as less focus on investments that rely on heavy borrowings.

Macro strategies on economic outlook, managed futures and the traditional long or short strategies would be in focus, he said. Bell said investors could see better terms for less liquid strategies such as arbitrage and distressed debt. The HFR Fund of Funds Composite Index dropped 20.68 percent in 2008, the industry's worst ever losses, hit by declining stock markets, sharp volatility in oil markets, the collapse of Lehman and temporary restrictions on short selling. Hedge funds started the year with small gains, outperforming a declining stock market in January.

Shipping costs have more than doubled this year, so it may be time to buy kroner, Aussies and loonies. The 147 percent jump in ocean-transport prices is evidence that China’s $580 billion stimulus plan will lift raw materials, said Ihab Salib, who oversees $3 billion at Federated Investments Inc. in Pittsburgh. That would benefit countries exporting them, so Salib is "actively trading" Norway’s krone and Australian and Canadian dollars, nicknamed Aussies and loonies. Salib and other currency traders have started using the Baltic Dry Index’s global gauge of raw-material shipping costs to help make such decisions. The index and the value of a basket of those three resource-rich countries’ currencies are increasingly moving in tandem -- 96 percent of the time in the past year, up from 84 percent in the past decade, data compiled by Bloomberg show.

"Historically, the Baltic Dry Index is a good leading indicator for commodity prices," said Salib, who declined to detail his investments. "Commodities are very depressed right now, and they offer good long-term value. Once they come back, these currencies should do well." The shipping gauge is a sign that China’s stimulus spending on housing, highways, airports and power grids will have impact beyond its borders. By Feb. 28, it will have spent 25 percent of its stimulus budget, Deutsche Bank AG said Jan. 20, predicting the country’s economy will grow at a 12 percent annual rate between the fourth and first quarter, after shrinking 2.3 percent between the third and fourth.

China is the world’s biggest consumer of copper and iron ore and has helped each rally this year by about 10 percent, benefiting Australia and Canada, which account for 10 percent of world production of the two metals. Oil, Norway’s top export, will average $66 a barrel in the fourth quarter, up from an average of $40.62 since Jan. 1, according to the median forecast of 34 analysts surveyed by Bloomberg. China is the world’s second-biggest energy user. "If a China recovery helps to set a floor on commodity prices, it should be an important boost to commodity-linked currencies," said Jim McCormick, Citigroup Inc.’s London-based global head of currencies, in a Feb. 5 report. So far this year, the krone is the second-best performer among the 16 most-actively traded currencies after Brazil’s real, falling less than 1 percent versus the U.S. dollar to 7.0014 by 11:14 a.m. in London. The Australian dollar dropped 8.9 percent to 64.05 U.S. cents. The Canadian dollar weakened 3.6 percent to C$1.2618.

Goldman Sachs Group Inc. predicts the Australian dollar will appreciate 9.5 percent to 71 cents in six months and the krone will gain 13 percent to 6 per dollar. Though Goldman sees the Canadian dollar little changed at C$1.25, the loonie has tracked the shipping index 72 percent of the time for the past five years. A comparison of the three currencies’ U.S. dollar values and the shipping index shows that the former often follow the latter, which is compiled by the Baltic Exchange, a London maritime organization named for the 18th Century coffee shop to which it traces its roots. The index hit a 2 1/2-year low on Nov. 7, 2001, following the 9/11 attacks. By eight months later, the three currencies had gained an average of 9 percent. The index peaked at 11,793 on May 20, 2008. By July, the Aussie, loonie and krone all were falling steadily; in the year’s second half, they declined 27 percent, 16 percent and 27 percent, respectively. The index’s climb to this year’s Feb. 11 peak of 2055 followed a 92 percent decline in 2008.

Richard Benson, who oversees $14 billion in currency funds at Millennium Asset Management in London, said many of his peers "dismissed" the significance of the shipping index when it started falling last year. "It actually proved to be a very good indicator," Benson said. "When you piece together different bits of information, and the shipping index certainly is one of them, you’ll find the market is moving in the same direction. There’s huge, huge potential for commodity currencies." Investors are betting on all three currencies, with net flows into them in the past three months as much as four times stronger than the past year’s average, said Samarjit Shankar, global markets strategy director in Boston for Bank of New York Mellon. Millennium started buying Australian dollars this month and Norwegian kroner in January. Benson predicts that the krone will appreciate 5 percent to 8.30 per euro, and the Aussie will hit 72.50 cents versus the U.S. dollar, with "high 70s quite achievable."

David Tien, who helps money managers at Fischer Francis Trees & Watts oversee funds worth $29 billion as of mid-2008, said his firm has bulked up on the Aussie and the krone. Eight percent of the currency fund he oversees is in kroner and 15 percent is in Australian dollars. Tien said the shipping index backs up other evidence that China’s stimulus is working, including its loan growth, which reached a record 1.62 trillion yuan ($237 billion) in January, twice the record set in 2008. China’s "stimulus is really just getting under way," Tien said. "What that means is, within about one month or two months, you are going to see a spur in commodity demand. We think it’s a great time" to invest in kroner and Aussies. A rebound in hard commodities would benefit companies like Stavanger-based StatoilHydro ASA, Norway’s top oil producer; Potash Corp. of Saskatchewan in Canada, the world’s largest fertilizer producer by market value; and Melbourne-based BHP Billiton Ltd., the world’s biggest mining company. Those companies’ shares have risen 8.8 percent, 18.7 percent and 4.2 percent, respectively, this year.

A strengthening of the krone, Aussie and loonie would hurt exporters that report in their local currencies such as Melbourne-based Alumina Ltd., a partner in the world’s biggest producer of the material used to make aluminum, and Newcrest Mining Ltd., Australia’s largest gold-mining company, which returned to profit in the first half as prices of bullion in Australian dollars rose to a record on Feb. 12. Spending by China alone may not be enough to drive up demand for commodities and related currencies. Last month, the International Monetary Fund cut its estimate for world growth this year to 0.5 percent, the weakest since World War II. Joel Crane, Deutsche Bank strategist in New York, said in a Feb. 13 report that while "upward momentum remains in the Baltic Dry Index," its growth rate may slow "in the coming weeks." Anthony Michael, who helps oversee $158 billion globally as Asian head of fixed-income at Aberdeen Asset Management Asia Ltd., said the Canadian dollar may lag the Australian currency.

"One of our most favorable currency bets is that the Australian economy is going to recover through being leveraged off Asia much better than Canada," said Singapore-based Michael, who advises betting on the Aussie against the loonie. Another risk is foreign-exchange volatility, which remains high. Options traders see major currencies swinging as much as 19 percent in the next three months, compared with the four-year average of 9.7 percent, according to JPMorgan Chase & Co.’s G7 Volatility Index. "Commodity currencies are attractive on a one-year- horizon," said Steven Englander, chief U.S. currency strategist at Barclays Capital in New York. "First quarter, first half of the year? I am not sure. Longer-term, we expect them to appreciate significantly, but be careful about your timing."

From housebound grandmothers who relay on charity meal deliveries, to ailing retirees who cannot pay rising costs for medications, older Americans feeling the pinch of the financial crisis are getting angry and forming groups with names like "Senior Outrage." In New York, with city and state tax revenues tumbling, benefits and services to the elderly are being cut, and many older residents are furiously drawing comparisons to the billions of dollars spent to bail out banks -- and pay Wall Street bonuses.

Dolores Green, 68, retired as a home help worker and lives on a government Social Security check of $740 a month. She pays $719 a month in rent, leaving just $21 for everything else. To eat, she relies on the federal food stamp assistance program, and worries that her cost for some medication she needs for her diabetes has gone up to $8 from $3. To get by, she said: "I run errands for seniors. They may hand me $2 or $3 or something." Green says she sees more people seeking government assistance, such as her daughter, who lost her job after 25 years. "She's just applied for food stamps, she's got two kids," Green told Reuters at a community center where some 25 elderly New Yorkers were eating a lunch of sandwiches, a gelatin dessert, milk and tomato juice. "That's why she can't help me, because she's got to help her children."

"Maybe I'll move in with you," she jokes to her friend Alice Jordan, 80, a retired teacher who suffers from osteoporosis and high blood pressure. Jordan said her food stamp allocation had gradually eroded to $54 a month from $180. When she reads about the well-heeled victims of financier Bernard Madoff's suspected $50 billion Ponzi scheme, she says she wishes they would spare a thought for those who never had such wealth. "Just like this guy Madoff ripped them off, how did they feel when they lost their money and had to change their style of living? Think of us. ... How do you think we feel?" she asked.

New York City's Department for the Aging, which runs more than 300 community centers for aging residents and provides services such as food delivery to the homebound, affordable housing and heating subsidies, has cut its 2009 budget by $4 million to $285 million and faces another proposed cut, of $9.5 million, in 2010. The cuts are part of Mayor Michael Bloomberg's bid to close a $4 billion city budget gap caused by the collapse of corporate tax revenues, especially from Wall Street, which normally pumps a fortune into local coffers. New York state, which typically gets 20 percent of its revenues from Wall Street taxes, also is proposing cuts in health care and services for the elderly as part of a drive to close a $13 billion 2009 budget gap.

Among the proposals is a cut in the state contribution to the Federal Supplemental Security Income, or SSI, for elderly, blind or disabled people with little or no other income. Parvati Devi, 62, says that would cut her SSI check by $24. "I can't afford to have anything cut," she said. "We collect cans on the street, we do anything to survive." A couple of hundred retirees attended a forum with New York city and state officials this month to express their anger at cuts they say are hitting the most vulnerable people hardest. "We are outraged that the government, which has spent hundreds of billions of dollars to bail out financial institutions -- and they in turn have given $18 billion as bonuses to their top executives -- has no funds to support vital services for their senior citizens," said Muriel Beach, New York City head of the State Wide Senior Action Council.

State Wide and other groups formed the "Senior Outrage Coalition" this month to mobilize protest among the city's 1.3 million citizens aged 65 and over. "We are of a generation that fought in the sixties," she said. "We're out there doing it again." City figures show that in 2006, one-fifth of New Yorkers age 65 and older lived in poverty, twice the national average. Advocacy groups say by now it is closer to one-third, and New York is second only to Detroit among major U.S. cities in its rate of poverty among the elderly. Moreover, the federal poverty guidelines for 2008, $10,400 for a single person and $14,000 for a couple, are so low that many who are in need do not qualify for most public benefits.

Minorities tend to fare worst, with 30 percent of Hispanic, 29 percent of Asian and 20 percent of elderly blacks in poverty compared with 13 percent of elderly whites in New York City. A formidable crowd despite walkers, canes and wheelchairs, many at the forum vented rage at lavish bonuses being paid on Wall Street. Richard Gottfried, a state assemblyman, said while they might have been pleased to hear that six top executives at investment bank Goldman Sachs gave up their bonuses last year, the tax on their bonuses alone put $12 million into the state budget in 2007. "I, like many of you, could do a lot with $12 million," Gottfried said.

For two centuries, Wall Street survived wars, depressions, bank panics and terrorist attacks. Now Wall Street as we know it is dead. Gone.When a healthy and thriving person dies suddenly, a medical examiner may talk to family and friends to see if the deceased had recently changed behavior in some way. Wall Street did change radically in recent years in one notable way. Twenty or 30 years ago, it was common for the best and the brightest to be doctors or engineers. By the 2000s, they wanted to be investment bankers. When Wall Street was run by people randomly selected from the population, it was able to survive everything. After the best and brightest took over, it died the first time real-estate prices dropped 20 percent.

Are the two facts related? In other words, did Harvard kill Wall Street? The suspect certainly had the opportunity. If you walked into any major Wall Street firm a year ago and randomly selected an employee, chances are that person would either be from an Ivy League school like Harvard University, or have an MBA, or both. The statistics are striking. Back in the 1970s, it was typical for about 5 percent of Harvard graduates to work in the financial sector, according to a recent study by Harvard economists Claudia Goldin and Larry Katz. By the 1990s, that number was 15 percent. It probably climbed since then. And the proportion of those with MBAs grew as well.

Economists Thomas Philippon of New York University and Ariell Reshef of the University of Virginia found that, in 1980, workers in finance earned about the same wages, on average, as workers in other sectors. By 2005, financial-sector workers earned 50 percent more than similar workers in other industries. Philippon and Reshef went on to explore what caused the surge in wages in the financial sector. They found one of the key reasons was the increasing reliance on highly educated workers with post-graduate degrees. Their results accord with anecdotal evidence concerning the hiring practice of Wall Street firms. A 2008 report in Fortune said that Goldman Sachs hired about 300 MBAs in 2007 and that, last year, Merrill Lynch and Citigroup were planning to hire 160 and 235 MBAs, respectively. Is it just a coincidence that so many superstar minds arrived on Wall Street just as it died? Perhaps not.

Wall Street is gone because its firms did a terrible job assessing the risks of the positions they took. The models these firms used to evaluate risks failed. But having a failed model brings a firm down only if the firm collectively buys into the model. To do that, the firm must be run by people who have a great deal of faith in their models, and a great deal of faith in themselves. That’s where Ivy Leaguers and MBAs come in. What do you get from an MBA? One recent study found that MBAs acquire an enormous amount of self-confidence during their graduate education. They learn to believe that they are the best and the brightest. This narcissism has a real career impact. Psychologists at Ohio State University studied the behavior of 153 MBA students, who were put in groups of four and asked to orchestrate a large financial transaction on behalf of an imaginary company. The psychologists observed that the students who had the strongest narcissistic traits were most likely to emerge as leaders.

According to Amy Brunell, the lead author, the results of the study had large implications for real-world settings, because "narcissistic leaders tend to have volatile and risky decision- making performance and can be ineffective and potentially destructive leaders." Guys like John Thain (Harvard Business School, 1979) exemplify this behavior when their sense of entitlement is so grand that they can spend a fortune renovating an office while their firm is going down in flames. The consequences of Wall Street’s reckless brilliance in many ways parallel modern-day engineering disasters. If you travel through Italy, you can’t help but notice the many Roman bridges that still stretch across that nation’s waterways. How is it that the Romans could build bridges that would last thousands of years, while the ones we build today collapse after a few decades?

The answer is simple. Back then, they did not have the fancy computers required to calculate exactly how strong a bridge must be. So an architect made a bridge very, very strong. Today, engineers can calculate exactly how much steel they need to incorporate into a bridge to bear the expected load. The result is, they are free to make them weaker. Another result is less wiggle room for design error. Hence, modern bridge’s predilection for collapsing. The same is true of the financial sector. Back when Wall Street was run by individuals without fancy degrees, they had a proper skepticism toward fancy models and managed their risks with a great deal more humility and caution. Only when failed models became canon did catastrophe strike. Wall Street didn’t die in spite of being run by our best and brightest. It died because of that fact.

At least one government bailout seems to be working -- and even boosting the coffers of the Treasury Department. In mid-September, money-market mutual-fund investors were jolted after the $63 billion Reserve Primary Fund fell below a $1 net-asset-value level because it held commercial paper issued by Lehman Brothers Holdings Inc., which filed for bankruptcy. Investors began pulling money from other prime funds, which are a key source of funding for U.S. companies. It became harder for companies to raise money for their daily working needs, threatening to cripple the entire financial system. Within days, the Treasury took the unprecedented step of insuring assets in money-market funds to thwart massive withdrawals. Simultaneously, the Federal Reserve announced a liquidity facility to finance purchases of asset-backed commercial paper held by money funds.

This allowed funds to hold this paper without worrying that withdrawals by investors would force them to sell into an illiquid market. It worked. Money-fund assets began climbing and are now close to hitting a record $4 trillion, $450 billion more than in mid-September. These funds also are more comfortable in buying commercial paper and asset-backed securities. These measures "provided huge amounts of confidence in a market that was sorely lacking in that," says Deborah Cunningham, money-fund manager at Federated Investors Inc. In the case of the money-fund bailout, the government could even make money. To insure money funds, the Treasury charged them 0.01% to 0.022% of their assets. It has collected $813 million in such fees, and the agency hasn't paid any claims yet. One reason for the success of the money-fund bailout is that the problems were relatively simple and contained. Money funds held high-quality and short-term assets, so the risk of guaranteeing them wasn't high for the government. It also helps that no other financial giants have followed Lehman into bankruptcy.

In contrast, the situation with troubled mortgage assets held by banks is much more complex, posing a greater risk of loss to the government. Despite launching the Troubled Asset Relief Program to bail out banks, the government is still trying to figure out exactly how to value and acquire distressed assets. Still, the money-fund bailout highlights the need for swift and decisive action when the government intervenes in a failing market. In contrast, the changing emphasis of TARP has confused investors and undermined confidence in the rescue plan. Treasury Secretary Timothy Geithner recently proposed a plan to buy toxic bank assets, which was the original idea when TARP was announced. "We could have done this in October, when we first got the chance," says Milton Ezrati, senior economist at money-management firm Lord Abbett & Co.

More recently, the Federal Reserve has been trying to figure out how to make a program work that would help finance longer-term asset-backed paper. The Term Asset-Backed Securities Loan Facility, or TALF, has some similarities to the liquidity facility for money funds. But it is directed toward different investors, like hedge funds, and will lend them money to buy student, auto and other asset-backed loans. As cash flows into money funds again, debate is swirling over their future: Should such funds keep capital reserves and be regulated like banks? Or should they operate more or less as they did before the Reserve Primary Fund broke the buck? "If they are going to talk like a bank and squawk like a bank, they ought to be regulated like a bank," Paul Volcker, head of President Barack Obama's Economic Recovery Advisory Board, said recently. The Investment Company Institute, a fund-industry trade group, has opposed such a move.

Money funds were born in the early 1970s as a higher-yielding alternative to bank deposits. The early money funds invested in Treasury bills and bank certificates of deposit. To boost yields, they later began investing in high-yielding assets such as commercial paper and asset-backed securities. The Reserve Primary Fund started buying commercial paper in 2006. By 2008, commercial paper comprised half its portfolio, including a $785 million investment in Lehman paper. When Lehman filed for bankruptcy, the Reserve fund's net asset value fell by three cents, and investors began fleeing. As panic spread, investors pulled out nearly $350 billion from prime money funds in just two weeks in September. A good chunk went into government and Treasury-oriented money funds, but a net $123 billion left money funds altogether, according to the Investment Company Institute. On Sept. 19, the government guaranteed money-fund assets, and money soon began flowing back into them. Since November, nearly $230 billion has moved into prime funds, also partly because yields on Treasury-money funds have declined close to zero.

Meanwhile, managers of some prime funds who had been investing heavily in government securities in the fall started inching back into commercial paper. They have also started to increase the maturity of the investments they buy. "We're able to invest in a more typical fashion," says Robert Litterst, manager of Fidelity Cash Reserves fund, the largest retail-oriented money-market fund. Vehicles such as the $150 billion JPMorgan Prime Money Market Fund and the Federated Prime Obligations fund were among those that bought more asset-backed paper after the Federal Reserve announced its liquidity facility. Some money managers continue to hold large positions in government securities. Vanguard Prime Money Market Fund is nearly half in Treasurys and agency securities, up from just 10% in early 2007. Amid the recession, "your gut tells you, this is not the time to take a lot of risk," says manager David Glocke.

In what could turn out to be the greatest fraud in US history, American authorities have started to investigate the alleged role of senior military officers in the misuse of $125bn (£88bn) in a US -directed effort to reconstruct Iraq after the fall of Saddam Hussein. The exact sum missing may never be clear, but a report by the US Special Inspector General for Iraq Reconstruction (SIGIR) suggests it may exceed $50bn, making it an even bigger theft than Bernard Madoff's notorious Ponzi scheme. "I believe the real looting of Iraq after the invasion was by US officials and contractors, and not by people from the slums of Baghdad," said one US businessman active in Iraq since 2003.

In one case, auditors working for SIGIR discovered that $57.8m was sent in "pallet upon pallet of hundred-dollar bills" to the US comptroller for south-central Iraq, Robert J Stein Jr, who had himself photographed standing with the mound of money. He is among the few US officials who were in Iraq to be convicted of fraud and money-laundering. Despite the vast sums expended on rebuilding by the US since 2003, there have been no cranes visible on the Baghdad skyline except those at work building a new US embassy and others rusting beside a half-built giant mosque that Saddam was constructing when he was overthrown. One of the few visible signs of government work on Baghdad's infrastructure is a tireless attention to planting palm trees and flowers in the centre strip between main roads. Those are then dug up and replanted a few months later.

Iraqi leaders are convinced that the theft or waste of huge sums of US and Iraqi government money could have happened only if senior US officials were themselves involved in the corruption. In 2004-05, the entire Iraq military procurement budget of $1.3bn was siphoned off from the Iraqi Defence Ministry in return for 28-year-old Soviet helicopters too obsolete to fly and armoured cars easily penetrated by rifle bullets. Iraqi officials were blamed for the theft, but US military officials were largely in control of the Defence Ministry at the time and must have been either highly negligent or participants in the fraud. American federal investigators are now starting an inquiry into the actions of senior US officers involved in the programme to rebuild Iraq, according to The New York Times, which cites interviews with senior government officials and court documents.

Court records reveal that, in January, investigators subpoenaed the bank records of Colonel Anthony B Bell, now retired from the US Army, but who was previously responsible for contracting for the reconstruction effort in 2003 and 2004. Two federal officials are cited by the paper as saying that investigators are also looking at the activities of Lieutenant-Colonel Ronald W Hirtle of the US Air Force, who was senior contracting officer in Baghdad in 2004. It is not clear what specific evidence exists against the two men, who have both said they have nothing to hide. The end of the Bush administration which launched the war may give fresh impetus to investigations into frauds in which tens of billions of dollars were spent on reconstruction with little being built that could be used. In the early days of the occupation, well-connected Republicans were awarded jobs in Iraq, regardless of experience. A 24-year-old from a Republican family was put in charge of the Baghdad stock exchange which had to close down because he allegedly forgot to renew the lease on its building.

In the expanded inquiry by federal agencies, the evidence of a small-time US businessman called Dale C Stoffel who was murdered after leaving the US base at Taiji north of Baghdad in 2004 is being re-examined. Before he was killed, Mr Stoffel, an arms dealer and contractor, was granted limited immunity from prosecution after he had provided information that a network of bribery – linking companies and US officials awarding contracts – existed within the US-run Green Zone in Baghdad. He said bribes of tens of thousands of dollars were regularly delivered in pizza boxes sent to US contracting officers. So far, US officers who have been successfully prosecuted or unmasked have mostly been involved in small-scale corruption. Often sums paid out in cash were never recorded. In one case, an American soldier put in charge of reviving Iraqi boxing gambled away all the money but he could not be prosecuted because, although the money was certainly gone, nobody had recorded if it was $20,000 or $60,000.

Iraqi ministers admit the wholesale corruption of their government. Ali Allawi, the former finance minister, said Iraq was "becoming like Nigeria in the past when all the oil revenues were stolen". But there has also been a strong suspicion among senior Iraqis that US officials must have been complicit or using Iraqi appointees as front-men in corrupt deals. Several Iraqi officials given important jobs at the urging of the US administration in Baghdad were inexperienced. For instance, the arms procurement chief at the centre of the Defence Ministry scandal, was a Polish-Iraqi, 27 years out of Iraq, who had run a pizza restaurant on the outskirts of Bonn in the 1990s. In many cases, contractors never started or finished facilities they were supposedly building. As security deteriorated in Iraq from the summer of 2003 it was difficult to check if a contract had been completed. But the failure to provide electricity, water and sewage disposal during the US occupation was crucial in alienating Iraqis from the post-Saddam regime.

The US Securities and Exchange Commission on Tuesday charged Sir Allen Stanford, the billionaire Texan businessman, and three of his companies with a "massive" fraud through his Antigua-based offshore bank. Stanford International Bank, located in St John’s on the Caribbean island, has been the focal point of much controversy in recent weeks, sparked in part by a analyst’s note that was highly critical of the bank’s apparent ability to deliver consistently and significantly market beating returns on its $8.5bn portfolio of depositors’ assets.

As well as as SIB, the SEC has also charged Houston-based broker-dealer and investment adviser Stanford Group Company, and investment adviser Stanford Capital Management. The SEC also charged SIB chief financial officer James Davis as well as Laura Pendergest-Holt, chief investment officer of Stanford Financial Group, in the enforcement action In a statement, the SEC said Linda Chatman Thomsen, director of the SEC’s division of enforcement, said: "As we allege in our complaint, Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors. "We are moving quickly and decisively in this enforcement action to stop this fraudulent conduct and preserve assets for investors."

A US district judge has granted the SEC’s request to impose a temporary restraining order on the Stanford operations and to freeze defendants’ assets, and appoint a receiver to marshal those assets, the regulator said. A spokesman for Stanford did not return calls seeking comment. The SEC’s complaint, filed in federal court in Dallas, alleges that acting through a network of SGC financial advisers, SIB has sold approximately $8bn of certificates of deposit to investors by promising improbable and unsubstantiated high interest rates. These rates were supposedly earned through SIB’s unique investment strategy, which purportedly allowed the bank to achieve double-digit returns on its investments for the past 15 years. Sir Allen’s enterprises had been the subject of a joint investigation by the SEC, the Financial Industry Regulatory Authority (Finra), Florida Office of Financial Regulation and the FBI.

The investigation into Sir Allen’s operations initially centred on the Stanford Financial Group in Antigua, and have been ongoing for several months, according to people briefed on the situation. The inquiries pre-date the emergence of Bernard Madoff’s alleged $50bn"Ponzi" scheme in December, these people said. US regulators had contacted regulatory officials in Antigua about making inquiries into SIB. Trevor Mathurin, deputy administrator of the Financial Services Regulatory Commission in Antigua, told the Financial Times that the Antiguan regulatory body was currently "meeting to assess the situation, and will continue to pursue the matter." Mr Mathurin declined to comment further. Leroy King, head of the FSRC, told the FT last Friday that he had not opened a formal investigation because it had not received any specific complaints about the bank from its clients, but said it would be speaking to bank officials.

Federal agents enter Stanford Financial office Federal agents entered the Houston office of Stanford Financial Group on Tuesday, according to a Reuters eyewitness on the scene. About 15 people, some wearing jackets identifying them as U.S. marshals, entered the lobby of Stanford’s office in the Houston Galleria area, the eyewitness said. Houston-based Stanford Financial Group, which says it oversees more than $50 billion of assets, is being investigated by U.S. regulators, according to a person familiar with the matter. The New York Times reported that U.S. securities regulators had accused three top Stanford executives, including Robert Allen Stanford, of fraud. The Houston office of the U.S. Marshals Service had no immediate comment. A Stanford spokesman was not immediately available to comment.

As the economy in the European Union sinks deeper into recession, Brussels has proven itself to be devoid of ideas and solutions. Member states are going it alone -- and often getting in each other's way. At least the introductory remarks were friendly. The heads of Europe's largest telecommunications companies and their key suppliers recently convened for a morning meeting on the 14th floor of the bulky Berlaymont building in Brussels, which houses the offices of EU Commission President José Manuel Barroso. Two women delivered the opening remarks, European Commissioner for Competition Neelie Kroes and Viviane Reding, Commissioner for Information Society and Media. Reding said that she wants to reduce mobile telephone fees by up to 70 percent. The guests were horrified, complaining that Reding's plans would cost them billions of euros. "No one paid attention to our argument," said one of the attendees. "They don't even recognize the problems. The financial and economic crises are not truly acknowledged here." Telecommunications is one of the few industries still turning a decent profit -- and still interested in making investments. In return, the companies want "planning certainty." This includes, for example, their being exempted from new regulations coming from Brussels for several years.

It wasn't until December that EU heads of state and government had promised the industry "regulatory incentives" for broadband expansion. The companies now accuse the European Commission of thwarting such efforts. René Obermann, CEO of Deutsche Telekom, said heatedly: "It cannot be that the German government is setting up a major program for telecommunications infrastructure while Brussels thwarts it at the same time." Unfortunately, though, it can. In fact, much of what is currently coming from the EU leadership is contradictory. Some things make sense and some are counterproductive, but inconsistency is everywhere. Breathlessness has become a stand-in for leadership. The EU heads of state and government are scheduled to meet three times in the coming weeks, once for an extraordinary "crisis summit" on March 1, then for their normal "spring summit" just three weeks later and, finally, for a "job summit" in May. But despite the many summits, vision is in short supply in Brussels. It is a poor time for such a shortcoming. The EU at the moment badly needs a coordinated policy to confront the economic crisis. In such difficult times, heads of state are all too quick to reach for protectionist tools to protect their national economies.

But new customs walls or import barriers, though perhaps beneficial to an individual country in the short term, would weaken the EU family, which already faces the threat of protectionist policies from other parts of the world, such as the United States and Asia. At first, Barroso and his commission grossly underestimated the scope and velocity of the crisis. The use of the word "recession" in EU documents was even banned for a long time. Anyone who warned of tough times ahead, such as Industry Commissioner Günter Verheugen, was laughed at. In late November, everything changed. The Commission president suddenly positioned himself on the front lines in combating the crisis, and developed a bold €200 billion ($260 billion) program to stimulate the economy. But now, as Europe expert Fabian Zuleeg of the Brussels-based European Policy Centre (EPC) soberly concluded, "the Commission has neither the money nor the competency to do so." And even where the EU leadership plans to spend long-approved funds earlier than scheduled in the hope that this will stimulate the economy, a lack of suitable projects has translated into few opportunities to spend the money. A list of concrete targets submitted at the end of January comes to a total of €76 million ($99 million) -- for the entire year and the entire EU. "What does this have to do with stimulating the economy?" German Finance Minister Peer Steinbrück asks.

Aside from spending money, though, there is plenty to do. But, as Daniel Gros of the Centre for European Policy Studies (CEPS) points out, most of the Commission's proposals -- from guidelines for bank bailout packages to new rules for rating agencies; from clear regulations for government assistance for industry to guidelines for spinning off worthless toxic securities into so-called "bad banks" -- are "sensible, but of little importance." There is, in short, little good that Brussels can do. But it can do plenty of harm. Last week, for example, the Commission discussed guidelines for new CO2 emissions rules for commercial vehicles. Experts believe that merely the announcement of new standards would destroy the already ailing truck market. This, experts say, is because potential buyers will hold off on their purchases to see which regulations will in fact become law after a lengthy legislative procedure. But because a new European Parliament won't be elected until this summer, and a new Commission in the fall, nothing would happen before the end of the year. Germany would be the hardest-hit. "We should do everything possible now to stimulate the economy," Commissioner Verheugen told his colleagues last Wednesday. "Anything else has to wait." Most importantly, said Verheugen, it is imperative that nothing be done "to exacerbate the crisis." But whether he will manage to hold his ground against Environment Commissioner Stavros Dimas is questionable.

Verheugen already failed to assert himself when it came to environmental standards for automobiles. Looking back, he recently summarized the situation in a speech to members of the European Parliament: "With our legislation, we have made the European car much more expensive." And this at a time when the new US administration is constantly devising massive new bailout packages for its own auto industry. Under these circumstances, the EU Commission's dismal appraisal last week of the condition of the European economy was not surprising. The financial crisis has reached the real economy, the Commission noted, and the dilemma in the automobile industry is bringing down other sectors along with it. From the steel and chemical to the textile and electronics industries, sales are down across the board. On Friday, it was announced that the entire EU economy shrank by 1.5 percent in the fourth quarter of 2008. The downward plunge is accelerating, and that includes Germany. A wave of bankruptcies is spreading throughout the European economy. In Italy, bankruptcies were up 30 percent last year, and they have almost doubled in Ireland and Spain. This year experts anticipate about 35,000 bankruptcy filings in Germany, where the most prominent victims to date include underwear producer Schiesser, model train maker Märklin and porcelain company Rosenthal.

The economic climate in the European common currency zone has reached "an historic low," reports the Munich-based Ifo economic research institute. The banks' lending business is still sluggish. Countries like Romania are on the brink of bankruptcy. The Greek health minister is not even able to pay suppliers to government-owned hospitals. Some Eurocrats are already worried that the euro could eventually crumble under the pressure. Politicians are already beginning to lose their nerve. The Swedish government has promised Swedish automakers Saab and Volvo government subsidies if they agree to shift production away from Germany and Belgium and home to Sweden. Italian Prime Minister Silvio Berlusconi has hinted to Fiat that he plans to rescue the company if need be. And in Germany the latest conservative rising star is already wading into protectionist territory. Shortly before his appointment as Berlin's new economics minister, Karl-Theodor zu Guttenberg, a Bavarian, blue-blooded member of the conservative Christian Social Union (CSU), made it clear that he plans to stimulate "jobs in Germany, not in the Far East." It was precisely these sorts of protectionist policies that fired up the worldwide economic crisis in the 1930s. Czech Prime Minister Mirek Topolánek, the current holder of the European Union's rotating presidency, warned that the "scenario of 1930" could repeat itself. German Finance Minister Steinbrück warned of a "race of the lemmings."

French President Nicolas Sarkozy, who sought to portray himself as a model European only last year, is suddenly an ardent nationalist. He wants to lend French automakers PSA Peugeot Citroën and Renault a total of €6 billion ($7.8 billion) at low interest rates to "keep jobs in France." He recently said that it "isn't justified" for French automakers to build factories in the Czech Republic to produce cars to be sold in France. The French foray into protectionism only reinforces the image that the Czech prime minister has already formed of the EU's major players. According to Topolánek, the Germans and the French, in particular, are claiming special rights, subsidizing industries to the detriment of neighboring countries and overstepping the Maastricht criteria governing the euro, thereby ultimately jeopardizing the common currency's value. Sarkozy's most recent move has ruffled feathers, both in Prague and Berlin. But the French president is not the only target of European ire. German Chancellor Angela Merkel is deeply dissatisfied with European Commission President Barroso. Merkel's advisors criticize Barroso for having been all too willing to give in to French demands, hoping that this would improve his chances of re-election. Berlin is convinced that the French plans violate EU competition rules. Volkswagen CEO Martin Winterkorn is irate, noting "no one will benefit, neither employees nor companies nor customers, if the protectionism of French agricultural policy is transferred to the automobile industry," and that the unfettered exchange of goods and services has been good for Europe. "Everything else is a big step backward, with severe consequences," says Winterkorn.

But the Germans, too, quickly turn into combative nationalists when their own interests are at stake. In recent months, Finance Minister Steinbrück has repeatedly been vexed by "excessive requirements" coming from Brussels. From the sale of the financially strapped IKB Bank to the financial injections for the bankruptcy-threatened Munich commercial property lender Hypo Real Estate and the government's investment in Commerzbank, whenever he was called upon to save German banks from collapse, Steinbrück found himself butting heads with EU Competition Commissioner Kroes, who wanted to have her say in setting interest rates for government financial bailouts and conditions for national merger plans. Only when Steinbrück and his European counterparts joined forces to complain about the "legions of bureaucrats" and the "tight corset" of their conditions did the commissioner give in. Kroes is now processing the national bank bailout plans much more quickly and generously than before. But the number of plans is also increasing. Nevertheless, Steinbrück's and Merkel's success in battling Brussels is a distraction from the main problem: economic stimulus programs designed around national interest are no longer working. Premiums offered to Germans to scrap their old cars and buy a new one also help French carmakers. The Germans benefit from French government subsidies for the domestic automobile industry, since German production makes up about 20 percent of every Peugeot.

When the government programs are not coordinated, much is left to chance. In some cases effects are duplicated, while in others good intentions are counteracted elsewhere. "Because of the tight integration of the European economy, cooperation at the European level is indispensible," says EPC economist Zuleeg. "Unfortunately, politicians in some countries do not seem to recognize these relationships." His CEPS colleague Gros see an "ominous spiral" developing. "The Commission does nothing, because of the resistance coming from individual countries. As a result, they decide to take matters into their own hands." In fact, the European Commission has only very limited latitude when it comes to combating the crisis. When fair competition within the EU market is not the issue, the Commission simply lacks the necessary tools to deal with the crisis. Economic policy measures can be left largely to the jurisdiction of the member states. The Commission is also divided, plagued by infighting instead of presenting a united front. There is "no group spirit," says one Commission bureaucrat. As a result, Europe today is only as strong as the 27 heads of government in the EU allow it to be. But views on many issues differ widely in Berlin, London, Paris, Rome, Vienna, Prague or Riga -- not exactly a basis for workable bailout concepts. The EU's new East -- the Czech Republic, Poland and the Baltic countries -- is banking on the market's ability to fix itself. But for Dutch Finance Minister Wouter Bos, these countries are "freeloaders who do nothing and reap the benefits" provided by the active policies of others. The EU, says Bos, has not managed to find joint responses to the crisis. Czech President Václav Klaus takes a more light-hearted approach: "Dealing with the crisis is like treating the flu. It lasts a week if I go to the doctor, and seven days if I do nothing."

VK wrote:"Why would short term t-bills be safer than bank deposits? If the deposit is guaranteed up to a limit, than why is that guarantee not as good as the short term t-bills."

There are large number of investors that have millions which well exceeds the limit of FDIC insurance. Consider that Trillions of USD is held in Pensions, 401K's and hedge funds.

Many boomers have money in 401Ks, IRAs or other retirement funds that can't be moved into FDIC accounts.

VK also Wrote:"Are short term t-bills much safer from default in case the global system melts down one day?"

No, but its much better than many other investments. Short term t-bils are better than long term T-notes. At some point there is going to be a bond crash. Holding on to long term bonds would a mistake when the bond crash happens. With short term debt, an investor can hold the bonds to term. with a 5, 10, or 30 year bond, holding to term isn't really an option.

So in my understanding, lets say the global banking system were to melt down one day and there was a hypothetical electronic run on the banks.

If one had 100,000 in deposits in a bank (below the Govt guarantee) and 100,000 in short term t-bills. The amount would be secure in both cases, but if one had 1 million, it would be better to put that in short term t-bills as that amount is not secure in banks, being above the govt guarantee.

Or is it a possibility that even the Govt Guarantee would not be good with regards to bank deposit Insurance? Is there a possibility of a country defaulting on its debt but the deposits being secure? (like what happened in Argentina) Or is it far more likely that a global systemic banking crash would result in banks shutting down but govt debt not being defaulted on?

I know these are plenty of questions but i'm just wondering why short term t-bills are being recommended over govt guaranteed bank deposits for small investors in short.

Obama did not break with the criminal Bush junta on torture policy. His JD lawyers, just the other day, argued the case for the same 'rendition' privileges for his tenure of the executive branch.

Geither and Summers are little more than white collar thugs. Geither, too confused to 'figure out his taxes and yet Obama put him in a position to'rescue' the auto industry? Summers, the retread sock puppet imitation of Rubin 'Hood, also appointed by Obama to 'help' Geither with 'the car thing'. WTF?

Deposit insurance won't be worth the paper it's written on in a systemic banking crisis. If depositors get anything back at all under those circumstances it wouldn't be much and they'd almost certainly have to wait for it for a very long time. IMO bank deposits simply aren't secure as the banking system is insolvent.

Short term t-bills owned directly (such as through Treasury Direct) are much less vulnerable to disruption than bank deposits, although there is no such thing as a no-risk option. For smaller amounts I'd still prefer cash, but for larger amounts this may well not be practical. The bond market won't last forever, but it should outlast the banking system.

" The U.S. by far remains the world's leading manufacturer by value of goods produced. It hit a record $1.6 trillion in 2007 -- nearly double the $811 billion in 1987. For every $1 of value produced in China's factories, America generates $2.50."

So, it reads like the demise of American manufacturing has been greatly exagerated.

THe prohibition against incitement to violence here should cease, as there is little but the possibility that their heads may be burned separately from their torso, that would keep future exploiters from practicing their trade.

@Ilargi, re "Current estimates are, it’s hard to believe, that 11 million cars will be sold in the US in 2009. Even if that were so, which I doubt, 75% of them would likely be second hand cars"

Are you really predicting that new car sales in the U.S., which were at 13+ million in 2008, and in January were tracking at an annualized rate of around 9.5 million, will end up only amounting to 2.75 million, or thereabouts, in 2009? I can never tell when you're making a serious forecast and when you're just exaggerating for rhetorical effect.

If you're serious, that wouldn't just be the death of GM/Chrysler/Ford, that would also be the end of Honda, Toyota, Nissan, etc.

I&S,I realize one contrary article does not a trend make, but I found Spengler's post at the Asia Times online today (Obama, the Unilateralist) interesting. What are your thoughts?

Also, do we have any Croats here? I'm considering a move there in 6 months (I know, impossible to plan, but life as i've known it goes on in the meantime) and am wondering if anyone has current opinion on how it will fare? In all the articles lately on Eastern Europe's problems, haven't seen mention of it.

Allow me to repost a comment about bank nationalisation which I made last week on your Feb 10 blog page . I didn't get a response then, probably because I didn't post my comment until 2 days later. (I try to follow your blog thoroughly, but sometimes a day or three later.)

Other than recent published comments by Nouriel Roubini and Matthew Richardson (TAE Feb 15), I haven't seen any serious discussion of this (seemingly)reasonable option.

...greg

Stoneleigh,

I have come to believe that the only rescue possible for insolvent banks is by the following process1) nationalisation, then2) shedding all assets and liabilities of questionable valuation (preferably to a sister entity off-balance sheet, or 'bad bank'), then3) restructuring the balance sheet of the subsequent 'good bank' by dilution of existing equity, conversion of subordinated debt to equity (and perhaps conversion of some senior debt as well), and shifting some capital to the 'bad bank' entity (to allow it to meet its obligations while liquidating itself), and finally recapitalising the 'good bank' with federal funding.

Eventually the healthy 'good bank' could be re-privatised.

The advantages of this approach would be speed, virtual certainty of success and minimal dislocation to existing personal, commercial and corporate customers.

The resultant 'good banks' would be precluded from speculative trading and investments in derivative products, except through a fully off-balance sheet vehicle with no contingent liabilities attached.

I am assuming that all future derivatives trading will be carried out through a properly regulated market clearing house.

I haven't seen any serious commentary in the U.S. about this kind of approach. It seems so obvious to me. Do you see merits or major shortcomings, other than wiping out most of the remaining shareholder value?

Were I not completely convinced that chaos is getting ready to reign,I would believe that a concentrated attack on all "lib" communities on the net is taking place.The right in this country have unlimited financial resources they may use to begin to cripple the organizing that has spontaneously occurred in this country and others...it may be just a last ditch stand to regain power,by attempting to cripple any one or any organization that appears able to buck the system.I don't have the time or bread to find out

these are the death throes of our society.I advise you all to get your life/boat/raft/preserver ready as possible...its coming too soon.

My friend teased me about the fed sending me a iou for my tax return....I did not find it amusing...[maybe a little]I really really really need/want that bit of bread before the games this summer start.

When it's revealed that loans from Chinese state-owned banks are being used to speculate in stocks in Shanghai -- eyebrows shoot up, and OMG what a scam, when will they learn, bigger crash coming ...

Yet when Geithner and his flack BO talk about having the Fed lend money so hedge funds can speculate in bonds and derivatives (deeply discounted ones -- "toxic assets") we are supposed to salute the wisdom of this brilliant policy.

Seems like the two stories are more the same than different. Government uses its powers to create credit to reinflate asset prices.

Silly me, I thought the wise men in Washington would see the writing on the wall, that the only way to raise asset prices relative to existing debt was generalized crank-the-presses inflation. But no, they still think they can do the job with targeted creation of credit. As if simply restoring the total amount of credit in the economy to pre-crisis levels will restore asset prices to pre-crisis levels. Sounds simple and logical.

I disagree, weatherman. The only viable solution for bankrupt banks is to go bankrupt and be shut down, with creditors, shareholders, and depositors being wiped out.

Anything else is immoral as it constitutes taking from one to give to another (who failed in the first place). If people feel like giving banks charity, they are free to do so but you don't see many lining up to donate, do you?

The banks brought this mess upon themselves. They can take the first helping of suffering directly.

I think we're all aware that failed bond auctions are waiting in the wings for many, many soon-to-be failed states. Has anyone dared look beyond this looming black hole to what it portends? I mean we're talking collapse of governments. And not just corrupt little banana republic governments but large, staunch old battleship governments. Governments that we currently think of as uncollapsable.

Do you folks know what a collapsed government looks like? Do any of you have a clear ides what this means? Heads you're fracked, tails you're doubly fracked. Not that you'l have a coin to flip in any event.

A failed government spills over onto its neighbors and swamps them with refugees, who are usually the most desperate of the already desperate. Government employees do not get paid. Cops and firemen stop going to work. Houses burn, electricity grids fail, communication systems fail. Dmitry Orlov laments the stages of collpase in the old Soviet Union. But their collpase was *relatively* mild and happened in isolation. The rest of the world was doing quite well and lent a helping hand (economically).

We seem to be discussing sovereign debt placement failures like a bit of an "oops, honey I spilled the milk" kind of an event. It's much more serious than that. We're talking potential mayhem here. And I'm talking countries that we all think are uncollapsable...think of your favorite European or Asian vacation and then imagine that country looks like Haiti, or worse.

We have blackberries here too. I live across the street from a park and a school and in between there is an acre or so no-mans land of blackberries. I bought myself a machete, have ordered a bunch of pear trees and am going to hack into the middle at night and do a little guerilla gardening. I will think of you when I get pricked :)

I know everyone is mad at the "banksters", and I would be extremely happy to have them all forfeit their ill-gotten gains, as well as charge them all with fraud, if at all possible. Certainly turf out all of the senior executives along with their cronies on the boards of directors.

However, an economic recovery needs healthy banks, and IMO it would be much simpler and quicker to refloat the current banking system with fresh capital while liquidating all the bad assets, than it would be to create new banks from scratch.

Deleveraging needs to happen, and so does recapitalisation of the banking system.

I would think that a Chapter 11 bankruptcy restructuring could be accomplished. However, the only player that can provide debtor-in-possession financing is the US Government, so de facto nationalisation would be the probable result anyway.

The flavor of blackberries we have here is one called "Himalayan blackberries"that were actually brought here in the 1800 due to some fine tasting berries...and became the #1 noxious weed in Oregon.There is one good thing about these berries,though.[I live in the middle of a 8 acre patch]The stuff is living barbed wire,and grows so thick a car could not make it thru a heavy growth.Nor deer,bear,people ect.The stuff is nasty.Rip you a new one in short order.But after 10-12 years ,there is a wonderful leaf mold under the briar patch that will grow anything.here is a secret...rabbirs love the shoots and leaves...free rabbit food...

Has anyone else watched Frontline's "Inside the Meltdown" which aired last night? www.frontline.org

I thought there was a fair amount of fluff, such as Krugman singing Bernanke's praises. The program's overall content painted a picture in line with Stoneleigh's take on the authorities. They are fairly intelligent people who are partly blinded by their training and ideology, but they don't have ulterior motives such as disenfranchising the proles. It made case that the various choices of who to bail and who to fail has been an ad hoc affair - Bear Stearns was too "interconnected" to allow failure, but Lehman had to fail to prove to the market that the government would not encourage moral hazard.

I also thought it touched very briefly on the reason Fannie and Freddie were picked up by the Feds. Debt. "Their debt is held by virturally every large institutional investor in the nation". It's a shame the producers didn't see fit to explore that topic more deeply...

Having enjoyed good rapport the amicable Dave From Queens when I participated at DKos, I included note of his passing as a starting point to the sequence of observations out of respect. I do not mean to suggest he directly died by the agency of those involved in slandering him.

Instead I meant to give the back story to the UGOG site, and explain how groups operate online to destroy community and cohesive discussion. There exists search software by which "noise posses" can detect key phrases, which is frequently the case on US boards where a virtual "noise posse" censorship exists on the Israel/Palestine issue.

This also applies to a certain subject I brought up once upon a time back when.

I read that rabbits eat blackberry shoots and leaves. Can they eat these alone or do they need something else too? Also, do they eat full sized stalks, or just the smaller ones? And last, can you store this stuff to feed them over the winter?

BTW, I live just west of Portland and on our 3/4 acre the blackberry scourge is rivaled by English Ivy. I hear goats will eat both.

Brown - I saw Frontline's "Inside the Meltdown". I thought it was an overall summary of the banking mess. For the average person who is now kinda aware of a banking crisis, it was good that it told how the crisis began that is now spreading to other banks. The program was only an hour, so they couldn't go much into depth. Maybe that will come in a Part2?

It looks like that Cal. is playing hard ball to try to get the money flowing. It's too late to stop the layoffs.======It would not surprise me that the "bankers" are also playing hard ball when it comes to losing money. (B3 and homeforeclosure) and it would not surprise me that they are influencing the market in ways that I could not detect.=== I know about the rabbits and also heard about the goats. Trapping rabbits is my plan.jal

Here is a story about corrupt judges taking kickbacks from the prison industry.

http://www.truthdig.com/report/item/20090217_kids_for_cash/

The U.S. has 5% of world population and 25% of prisoners. The state of California says that it can release 40% of it's prisoners for economic reasons. Perhaps they should not have been there in the first place.

I'm beginning to believe that it is not safe to live in this country. All branches of government seem to have been corrupted. Perhaps it's time to declare this "system" null and void.

Regarding the Frontline program - I hope they get more in depth in the latter segments too.

If one is to trust Frontline's take the on the situation and those entrusted with the power to attempt to direct the crisis' course it lead me to the conclusion that Bernnanke, Paulson, Bair, Geithner, et alia are moving in an uncoordinated, unplanned, ad hoc manner. They address each crisis as it looms rather than planning for the future. Thinking along these lines then brought me to a place that Ilargi has addressed in his writing for months now. The next crisis is going to be political - will that too be dealt with in short-term fixes? Assuming Frontline is correct about the nature of our "leaders" the answer is probably yes.

My analogy of late - We (the body politic) has had a terrible accident with a hydralic money splitter. Both arms are torn and bleeding profusly. The ER team (our intrepid leaders in Washington) are slapping gauze on the wounded, bleeding arteries when what is needed is a deep suturing job, and the recognition that even with a properly placed couple of stitches function will never return to the injured limbs, but perhaps a life of sorts can be salvaged for the rest of the body. Instead of taking the needed immediate steps, the team entrusted with salvaging from the damage, is holding some pressure on the wounds, infusing a little IV fluid, and promising to get the best plastic surgeons in the world to come fix these broken wings and teach us to fly in a couple of weeks. We've been bleeding credit pretty hard since last fall and our compensatory mechanisms are going to give out sometime soon. Once the amount of money (or blood) crosses below a yet to be determined point hypovolemic shock will ensue and then death is not far off.

An interesting article by Michael Hudson, which also discusses the EE/EU tangle and puts what's happening here as reflection of that relationship:http://www.counterpunch.org/hudson02172009.htmlFinance Capitalism Hits a WallThe Oligarchs' Escape Plan